Dow’s drop reflects extent of U.S. economic troubles
Only weeks after it seemed the stock market was on the road to recovery and the economy might soon follow it, the Dow Jones industrial average tumbled more than 350 points Thursday to a 21-month low as the price of oil topped $140 a barrel and worries grew about the financial health of U.S. consumers.
The bruising decline followed a recent barrage of bad economic news that added to concerns that many Americans -- deep in debt and having trouble borrowing more money from banks already reeling from loan losses -- could be forced to rein in their spending for years to come.
Consumers’ expectations for the economy over the next six months are at their lowest level in at least four decades, a survey released this week said. Home prices in major U.S. cities skidded 15% in the last 12 months, according to another recent report. The price of oil is up 45% this year. And last month, the U.S. jobless rate jumped to 5.5% as employers trimmed their payrolls for a fifth consecutive month.
“They’re getting hit from all sides,” Paul Kasriel, chief economist at Northern Trust Co. in Chicago, said of consumers. “The unemployment rate is going up. One of their principal elements of net worth -- their house -- is going down in value at a pace it’s never gone down before in the postwar period. And of course they’re getting hit with higher food and energy prices. That’s a pretty tough combination.”
Those woes have cast doubt on the economy’s ability to rebound in the second half of the year, which many on Wall Street had expected as recently as a month ago. The hope was that a mix of Federal Reserve interest-rate cuts, tax rebates and a winding down of losses at financial institutions would trigger a midyear rally in the stock market.
But the rate cuts and rebates have had only a modest effect so far, and many financial firms still are bleeding red ink. Meanwhile, the run-up in oil has stoked inflationary pressures, and global economic growth -- the supposed elixir that would offset U.S. weakness -- has shown signs of sputtering.
Adding to the angst was the Federal Reserve’s decision Wednesday to end its 10-month string of interest-rate cuts. The Fed is caught in a difficult spot: afraid to stir up inflation by lowering rates but fearful of stunting the economy by raising them.
That means the economy probably will have to work through its problems on its own, a slow process that doesn’t bode well for the stock market or the job market in the near term, experts say.
“We’ve been looking to the Fed to more or less have our back,” said Jane Caron, economist at Dwight Asset Management in Burlington, Vt. “Now with inflation pressures being what they are, the Fed is limited in what it can do to support the economy and the markets.”
The news Thursday was something of a microcosm of the stock market’s recent afflictions.
In futures trading on the New York Mercantile Exchange, oil jumped $5.09 to $139.64 a barrel, a record closing price, after briefly topping $140 for the first time.
A debate is raging in Washington and on Wall Street about oil’s astounding rise in the last year and whether it has been driven primarily by increasing global demand or by speculators.
Whatever the cause, energy prices have been hammering consumers and companies.
“It all pivots around the price of oil,” said Gail Dudack, head of Dudack Research Group. “If the price of oil was not galloping higher for the last 12 months, we wouldn’t be as worried about homeowners, consumers and profit margins.”
Meanwhile, depressed bank and brokerage stocks were again hit especially hard Thursday as Goldman, Sachs & Co. issued a downbeat report on the sector and investors braced for another potential round of huge mortgage-related write-offs.
The financial industry’s woes have lingered far longer than many experts expected and may not lighten until the housing market improves. As home prices head lower and foreclosures increase, banks are forced to write off more loans, moving further into a defensive crouch in which they rein in lending.
“Home prices are at the center of a vicious circle that is blocking the provision of credit to the overall economy,” said Douglas Peta, market strategist at J.&W.; Seligman & Co.
The Dow plummeted 358.41 points, or 3%, on Thursday to 11,453.42. The blue-chip indicator is down 14% for the year and 19% from its all-time high set in October.
The broader Standard & Poor’s 500 index fell 2.9% on Thursday and is down 18% from its October peak.
Though the indexes haven’t met the technical definition of a bear market -- a 20% drop -- stocks’ recent drubbing has made their recovery from mid-March to mid-April, during which the Dow rose 11%, look like a short-lived spike within a longer, deeper downturn.
“It was a fake rally,” said Paul Desmond, president of Lowry Research Corp., a stock-research firm in North Palm Beach, Fla.
Since 1929, the Dow has fallen an average of 30% during bear markets, Desmond said. The current decline, he said, could be worse than average.
“I’ve been at this close to 45 years, and I don’t remember too many of those bear markets having as many background problems as this one has,” Desmond said. “The likelihood of this decline being an average decline is highly unlikely. It’s going to be deeper than that.”
The current sell-off has erased the belief that the market hit bottom after the startling eleventh-hour rescue of collapsing investment bank Bear Stearns Cos. in March.
When the sub-prime mortgage crisis morphed into a broad credit crunch last summer, some market watchers said conditions wouldn’t improve until a major Wall Street firm failed. At the time, that seemed unlikely. But when Bear Stearns was forced into the arms of rival JPMorgan Chase & Co. in a Fed-engineered salvage operation, there was relief on Wall Street that the central bank had prevented a systemic panic.
“Investors may have jumped too quickly and thought, ‘Here’s Bear Stearns. We’ve dealt with that and now it’s over,’ ” Dudack said.
The market failed to realize, she said, that the economy’s weakness is “going to be a long and drawn-out affair.”
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