Credit fears take toll on Dow
The stock market buckled Wednesday, erasing all of this year’s gains for the Standard & Poor’s 500 index, as worries about the credit markets mounted.
Wall Street rallied early in the day and then slumped in the final two hours of trading.
The Dow ended down 167.45 points, or 1.3%, to 12,861.47, its fifth straight decline and the lowest closing level since April.
The S&P; 500 index fell 19.84 points, or 1.4%, to 1,406.70. That wiped out the last of its gains for the year, leaving the index down 0.8% since Dec. 31.
The Nasdaq composite slid 40.29 points, or 1.6%, to 2,458.83, and the Russell 2,000 small-stock index fell 1.5%.
The S&P; 500 now is down 9.4% from its record high reached July 19. As painful as the drop has been for investors, it doesn’t yet rank as a typical “correction,” or short-term pullback, in a bull market.
Historically, corrections of 10% to 15% have occurred periodically in bull markets. But the S&P; now has gone more than four years without losing at least 10%.
That streak may be about to end, many analysts say.
“Feels like we’re on the edge of a panic to me,” said Jeffrey Saut, who oversees $33.7 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Fla.
“In our business, psychology is everything and psychology has changed real quick on Wall Street,” he said.
Stocks plummeted after Merrill Lynch speculated that Countrywide Financial, the nation’s biggest mortgage lender, could face “effective insolvency” should creditors force it to sell assets at depressed prices.
There also was growing concern about the state of the market for short-term debt, as some skittish investors have balked at buying even IOUs that would mature in a matter of months.
Countrywide dived $3.17, or 13%, to $21.29, leading another broad retreat in shares of lenders, home builders and real estate investment trusts.
The market sell-off extended well beyond financial and housing issues, however. Losers topped winners by 5 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq.
The so-called VIX index, a gauge that tracks prices of option contracts on the S&P; 500 and essentially measures the level of fear in the market, jumped from 27.68 on Tuesday to 30.67, its highest level since 2003.
“What that indicates is that people are worried not about this move or the past couple of weeks but the possibility of a real market sell-off or crash scenario,” said Ben Londergan, co-CEO of Group One Trading in Chicago.
Wall Street’s plunge dragged other North and South American markets sharply lower. The main stock index in Canada sank 1.5%, the Mexican market slumped 2.6% and Brazilian shares tumbled 3.2%.
Investors poured into short-term Treasury bills, seeking haven. The yield on six-month T-bills fell to 4.43% from 4.79% on Tuesday.
The 10-year T-note ended at 4.72%, down from 4.73%.
Crude oil prices rose, with near-term futures gaining 95 cents to $73.33 a barrel on worries about a tropical storm approaching the Gulf of Mexico.
The Federal Reserve came under renewed pressure to step in with credit injections or even a formal interest rate cut after another day of wild swings and uncertainty in financial markets.
The central bank’s injection of $7 billion of additional credit to the banking system early Wednesday seemed to help stabilize the markets for a short period. But by late in the day fear had returned that the nation’s financial system was freezing up as investors fled all but the lowest-risk U.S. government securities.
St. Louis Fed President William Poole said in an interview with Bloomberg News that the financial crisis had not yet spilled into the economy as a whole and, as a result, the central bank didn’t need to consider interest rate cuts until its next scheduled meeting on Sept. 18.
“It’s premature to say that this upset in the market is changing the course of the economy in any fundamental way,” Poole said.
“They need to provide the liquidity that the market needs to function, but that’s well short of changing monetary policy,” said Ken Mayland, president of ClearView Economics. “I don’t think the Fed yet sees a strong case for reducing rates.”
Indeed, the Fed said industrial output rose 0.3% in July, pointing to continued strength in the manufacturing sector.
But investors Wednesday were dumping many industrial, commodity and transportation issues, which some analysts said reflected rising fear that the economy would be tripped up in coming months.
Machinery giant Caterpillar slumped $1.82 to $74.95, U.S. Steel lost $5.10 to $80.95, mining firm Rio Tinto dropped $8.47 to $243 and the Dow transports index slid 3.3%.
