Hopes for a break in volatility are dashed as Dow tumbles 280 Stocks drop on economic worries
Wall Street shifted back into fear mode Tuesday and took a lot of other markets with it.
After rebounding last week, stocks were hammered by news of sinking consumer confidence, a downbeat assessment of brokerages’ earnings prospects and another round of worries about financial companies’ exposure to potentially risky debt.
The Dow Jones industrial average sank 280.28 points, or 2.1%, to 13,041.85. It was the blue-chip index’s biggest decline since it fell 387 points Aug. 9, although trading volume in recent days has been nowhere near the frenzied levels of earlier this month.
Still, weary traders had been hoping for a break in volatility.
With Labor Day weekend approaching, “I actually thought we’d have a relatively quiet week,” said Andy Brooks, a trader at T. Rowe Price Group in Baltimore. “I guess not.”
The broader market also tumbled, although all major indexes held above the lows they reached the week of Aug. 13.
Stocks of some home builders, however, fell to multiyear lows, battered by a report that showed an index of U.S. home prices fell 3.2% in the second quarter from a year earlier.
Shares of Los Angeles-based KB Home slid $1.67 to $28.52, the lowest in more than four years. The stock has plunged 44% this year after tumbling 29% last year.
Wall Street’s sell-off dragged down European stock markets as their trading sessions were ending and slammed share prices in Mexico, Canada and Brazil, all of which were recovering last week.
The U.S. market got off to a bad start after the Conference Board said its index of consumer confidence sank to 105 this month from 111.9 in July and now was the lowest in a year.
Falling confidence reignited concerns that consumers could push the economy into recession if they pull back significantly on their spending -- although how people say they feel in sentiment surveys often doesn’t correlate with their actual spending.
Jitters about the economy clipped prices of many commodities, on fears that robust global demand for commodities could reverse if growth dimmed. Gold, copper and aluminum prices declined in futures trading.
In the stock market, some of the day’s biggest losses were suffered by financial stocks, just as they have led the way down through much of the summer sell-off.
Merrill Lynch cut 2007 and 2008 earnings estimates for some of its rivals, including Lehman Bros., Bear Stearns and Citigroup.
The investment banks made huge sums in recent years selling mortgage-backed bonds and financing corporate buyouts, but those businesses are fading now as many lenders and investors turn fearful about credit risk, Merrill noted.
The firm estimated that Lehman would earn $6.80 a share in 2008, down from a previous estimate of $8.68.
Lehman’s shares slid $3.47, or 6%, to $54.28; Bear Stearns fell $3.78, or 3.4%, to $108.42; and Citigroup sank $1.65, or 3.5%, to $46.14.
Merrill’s own stock wasn’t spared: It dropped $2.89, or 3.9%, to $72.
The financial sector also was hurt by another batch of reports that focused on companies’ links to dicey mortgage debt and other troubled securities.
State Street, which provides money management services to big investors worldwide, fell $2.72, or 4.3%, to $61.16 after the Times of London said the company had credit-line exposure to so-called conduits that issue asset-backed commercial paper. That’s a type of short-term IOU that some issuers have had trouble selling in recent weeks as global credit markets have turned skittish.
But State Street said its conduit commercial paper programs continued to sell debt daily.
In a separate report, the Boston Globe said one of State Street’s institutional bond funds had lost 37% of its value this month. The company declined to comment.
A number of bond funds have recorded steep losses this summer as bets on what had been viewed as low-risk securities -- particularly in the mortgage sector -- instead exploded. Rising home loan defaults have caused many investors to flee mortgage-backed bonds of all kinds.
Some analysts said the Federal Reserve added to the depressed mood Tuesday after the minutes of its Aug. 7 meeting showed that policymakers were concerned about tumbling markets, but continued to believe that the economy would hold up. That may have dashed some investors’ hopes for a cut in the Fed’s key short-term interest rate.
But the Aug. 7 Fed meeting is practically ancient history now. The central bank next meets Sept. 18, and many Wall Street pros continue to bet that policymakers will lower their benchmark rate from 5.25% to 5% to soothe markets.
One market sector that can’t get a rate cut soon enough: home builders. Among the stocks falling to new multiyear lows Tuesday were Centex, down $2.13 to $28.15; Lennar, down $1.33 to $27.23; and Standard Pacific, off $1.34 to $8.60.
By contrast, broader market indexes remain above their summer lows reached the week of Aug. 13. The Dow’s closing low that week was 12,845, or 1.5% below Tuesday’s close.
The Standard & Poor’s 500 index, which declined 34.43 points, or 2.4%, on Tuesday to 1,432.36, closed at 1,406.70 on Aug. 15.
The Nasdaq composite, which was down 60.61 points, or 2.4%, to 2,500.64, closed at 2,451.07 on Aug. 16.
Many market chart-watchers have expected key indexes to “re-test” their mid-month lows. If they can hold above those levels it would be viewed as a positive sign that the sell-off may be close to running its course.
“I think this is all part of a bottoming process,” said Steve Goldman, market strategist at brokerage Weeden & Co.
But he thinks that the ultimate bottom in the market may not be reached until September or October. And if the economy weakens significantly, Goldman said, hope for an end to the selling would go out the window.
Among Tuesday’s market highlights:
On the New York Stock Exchange, losers outnumbered winners by more than 6 to 1. But trading volume was modest, which suggested that there was no panicked rush for the exits.
In commodities markets, near-term crude oil futures dipped 24 cents to $71.73 a barrel. Gold futures dropped $2.40 to $664.40 an ounce.
Among commodity producers, Exxon Mobil fell $2.12 to $83, Aluminum China dropped $5.45 to $61.90 and miner BHP Billiton declined $2.30 to $59.71.
Treasury bond yields fell as some investors moved back into the securities. Bonds’ yields fall as their prices rise. The 10-year T-note eased to a five-month low of 4.51% from 4.57% on Monday.
In foreign trading, the British market slid 1.9%, Mexican stocks tumbled 3.1% and the Canadian market lost 1.6%.
El Segundo-based Mattel slipped 25 cents to $21.43. The stock was lifted from its lows of the session after the company said it increased its share buyback program by $500 million.
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