Dow Reverses Early Loss, Posts Gain
U.S. stocks staged a dramatic turnaround Thursday, raising hopes that Wall Street might be pointing to the end of the global plunge in share prices.
The Dow Jones industrial average tumbled as much as 173 points early in the session, then rebounded to close with a 7.92-point gain, to 10,938.82. Broader U.S. indexes also recouped nearly all of their steep early losses in the heaviest trading of the year.
Wall Street pros said the snap-back had no specific trigger. “I think the sellers have just run out of steam,” said Art Hogan, market analyst at brokerage Jefferies & Co. in Boston.
As trading began, the U.S. market took its cue from foreign markets, which were slammed again by worries about rising interest rates. The European Central Bank and those of Turkey, India, South Korea and South Africa tightened credit Thursday, echoing concerns raised by the U.S. Federal Reserve about inflation pressures.
For the global economy, “there’s a sound of central bankers stepping on the brake,” said James Glassman, senior economist at JPMorgan Securities in New York.
That is fueling fears that the banks will torpedo the worldwide economic expansion.
Those concerns began to build after the Fed met May 10, raised its key short-term rate for a 16th time since mid-2004 and warned that it might continue to tighten credit to quash inflation.
That disappointed investors who had expected the Fed to signal that it was finished raising rates. Stocks worldwide have mostly been sliding ever since.
The losses have been much worse in foreign stock markets, many of which had rocketed to record highs in the first four months of the year on optimism about economic growth.
The Indian stock market, which plunged 4.7% on Thursday, is down 26.3% from its May 10 peak. South Korea’s main market index is down 16.5% since May 11, including a 3.4% drop Thursday.
By contrast, the U.S. Dow index is down a modest 6% since reaching a six-year high on May 10. American blue-chip stocks may be benefiting from the perception that they are a relatively safe place to be amid unraveling global markets.
The technology-dominated Nasdaq composite index, which ended down 6.48 points, or 0.3%, to 2,145.32 on Thursday, has fallen 9.5% since hitting a five-year high in mid-April. At its low Thursday it was down 11.4% from its April high. A decline of 10% to 15% is considered a normal “correction” in a bull market.
With the Fed and other central banks tightening credit in unison, the major concern is that they might go too far, bringing on an economic recession that could cause corporate earnings to crash -- pulling the rug out from under share prices, analysts say.
Yet many market pros say those worries are exaggerated.
“I don’t think it’s the start of a bear market or a recession. I think the economy is just slowing down to a more sustainable growth rate,” said Alexander Paris, investment strategist at Barrington Research Associates in Chicago.
“When all the smoke clears, we probably will have the ‘Goldilocks’ economy that everyone talks about -- not too hot, not too cold,” he said.
Glassman said he also believes that investors have become overly anxious about the economic outlook. Central banks, he said, are taking the right step in trying to cool off what has been a robust global expansion.
“The ghost of the 1970s is really haunting them,” he said of policymakers. High prices for oil and other commodities helped to spark an inflationary spiral in the 1970s that was disastrous for many economies and for financial markets.
If central banks can damp inflation pressures this time around, “they’re going to give a much longer life to the economic expansion,” Glassman said.
But investors in much of the world only saw red Thursday as short-term interest rates rose.
South Africa’s stock market plummeted 6.5% after the country’s central bank raised its key rate from 7% to 7.5%, citing inflation worries.
In South Korea the main market index dived 3.5% after the Bank of Korea raised its benchmark rate from 4% to 4.25%.
In Europe most stock markets lost between 2% and 3% after the European Central Bank’s decision to boost its key rate from 2.5% to 2.75%, a three-year high.
On Wall Street, sellers were in control for the first two hours. But then the tide turned, and the market moved steadily higher for the rest of the session.
The mood may have been helped as investors reacted to the death of Abu Musab Zarqawi, the leader of Al Qaeda in Iraq. That news sent oil prices modestly lower: Near-term crude futures ended down 47 cents at $70.35 a barrel in New York, after earlier falling as much as $1.72.
But Zarqawi’s death had been announced before the U.S. market opened, and failed to halt the early sell-off.
The morning losses were heavy enough on the New York Stock Exchange to trigger automatic “collars” that limit certain kinds of computerized trading in blue-chip issues, to guard against a cascade of selling. The collars were put in place after the 1987 market crash.
Al Goldman, market strategist at brokerage AG Edwards in St. Louis, said the early plunge had the earmarks of a “wash-out capitulation,” as some investors dumped stocks in panic, on enormous trading volume.
When that selling exhausted itself, he said, the market was primed to rebound.
“We think the decline is over,” Goldman said. Thursday “was a very important market day for at least the near term.”
Others aren’t so sure the selling has run its course. The government next week will report on consumer inflation trends in May. And investors have three more weeks to steel themselves for the next Fed meeting -- when policymakers are expected to raise their key rate to 5.25% from 5%.
Even if investors don’t believe the global expansion is in danger, it has made sense for some people to adopt a more cautious stance given the uncertainty that accompanies tighter credit, said Jerry Webman, senior investment officer at Oppenheimer Funds in New York.
“The market has correctly said that this is a period when people should get paid a little more to take risk,” he said.
Indeed, the highest-risk markets -- those of emerging economies and small-company stocks, for example -- have beaten the fastest retreats over the last month. They also were vulnerable because they had led the global bull market for the last three years, analysts noted.
Among Thursday’s highlights:
* Gold, copper, nickel and other metals plunged in price, reflecting worries that a slowing global economy could depress demand for many commodities. Near-term gold futures in New York sank $18.30 to $609.10 an ounce, the lowest since mid-April.
* The Standard & Poor’s 500 index ended with a gain of 1.78 points, or 0.1%, to 1,257.93, after being down as much as 1.7%.
On the New York Stock Exchange, losers topped winners by about 9 to 7, a sharp improvement from early in the session.
* The Russell 2,000 small stock index lost 0.25 point to 706.53. At its low for the day it was down 12.4% from its record high on May 5. At the close it was down 9.6% from its record.
* Treasury bond yields slipped as some investors fled stocks for bonds. The 10-year T-note yield ended at 5%, down from 5.02% on Wednesday.
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Losses deepen
Cumulative losses in key stock market indexes in the U.S. and around the world in recent sell-off:
*--* Pctg. drop from Market/index recent high S&P; 500 -5.1% Dow indus. -6.0 Canada/S&P-TSX; -8.6 Nasdaq compos. -9.5 Russell 2,000 -9.6 Germany/DAX -12.3 Brazil/Bovespa -15.6 Mexico/IPC -16.3 South Korea/compos. -16.5 Japan/Nikkei 225 -16.7 Russia/RTS -22.9 India/Sensex -26.3
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Source: Bloomberg News
