Investors fear end of an era
Wall Street took its steepest plunge in five months Thursday amid fears that the era of easy money that fueled a boom in home loans and a wave of corporate takeovers was coming to an end.
The sell-off was triggered by a fresh spate of bad news about U.S. home sales, including some of the gloomiest statements yet by builders about the health of their industry.
“The downturn in the housing market is going from bad to worse; of that there is no doubt,” Merrill Lynch economist David Rosenberg said in a report to clients.
Many investors fear that sharp increases in mortgage foreclosures will dent U.S. economic growth by draining consumers’ spending power and deflating their confidence.
Though few signs of broader economic trouble have surfaced, investors didn’t wait around Thursday -- launching a frenzy of selling.
“For the moment, we have a mini-panic,” said Marshall Front, chairman of Front Barnett Associates, a Chicago-based investment firm.
Although other recent market plunges have been followed by sharp recoveries, one market analyst warned that this time could be different.
“We should be thinking in terms of rallies to sell rather than rallies to buy,” said Phil Roth of brokerage Miller Tabak & Co. in New York.
The Dow Jones industrial average, which during the day had been down nearly 450 points, finished at 13,473.57 points, down 311.50, or 2.3%, from Wednesday’s close. Other major stock indexes suffered similar losses.
The Dow, which closed a week earlier at a record high just above 14,000, has tumbled 3.9% from that peak.
Stock markets around the world also tumbled Thursday, with major indexes down 3.1% in Britain and 3.6% in Mexico.
The question is whether the slide over the last week could extend into a decline of at least 10% that would signify the first market “correction” of the 4 1/2 -year-old bull market -- or even mean the end of that long climb.
While some analysts said stocks had more room to slide, others argued that the mood on Wall Street was so bad Thursday that the market could only improve from here.
“Judging by the questions I’m being asked -- not least of which is, ‘Is this the end of the world?’ -- this is a classic selling climax where you can almost hear people saying, ‘Get me out at any price,’ ” said Al Goldman, chief market strategist at brokerage A.G. Edwards.
The day began with a government report showing a bigger-than-expected drop in sales of new homes last month. And two builders that cater to first-time buyers, D.R. Horton Inc. and Beazer Homes USA Inc., posted larger-than-expected losses for the spring quarter, which is normally the best time of year to sell houses.
“It is unclear to us when the housing recovery will begin,” said Donald Tomnitz, chief executive of D.R. Horton.
Economists at Moody’s Economy.com also predicted Thursday that the housing downturn would extend into late next year and mortgage delinquencies, currently 2.9% of all mortgage debt, would peak at 3.6% next summer. Home foreclosures on adjustable-rate sub-prime loans will hit 10% and 20% on such loans made late last year, when lending standards were particularly slack, the firm said.
The foreclosures “will have a substantial impact on the broader economy,” said Mark Zandi, chief economist at Moody’s Economy.com.
But he and others said the housing slump was not enough to spark a recession because employment remains strong. Indeed, new claims for jobless benefits fell slightly in the latest week, the government said Thursday.
“The overall economy is far less dramatic than what’s taking place on Wall Street,” said David Kelly, economic advisor at Putnam Investments in Boston.
However, an increase in late payments on home loans would only exacerbate the debacle in the market for bonds backed by sub-prime mortgages, those issued to people with poor credit.
The sub-prime crisis continued to be felt Thursday in the separate market for high-risk corporate debt known as junk bonds. That sector suffered its worst day since 2002, further imperiling the unprecedented pace of acquisitions by private equity firms, which buy public companies in debt-driven deals. Such buyouts have helped propel the stock market’s sharp gains this year.
Investors continued to turn a cold shoulder to junk bonds and other high-risk debt being marketed to finance buyouts. Nearly a quarter of a trillion dollars of such securities were scheduled to be offered in the next six to nine months, but a number of such buyout financings have been postponed or canceled this month in the face of weak or nonexistent demand. The investment firm acquiring automotive giant Chrysler had to postpone a $12-billion bond sale this week as investors balked at the terms.
The market’s newfound aversion to risk sent the average interest rate on an index of 16 junk bonds soaring Thursday to 8.71%, a four-year high, data compiled by KDP Investment Advisors Inc. showed.
“The market is just very, very nervous,” said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.
Several market analysts said the heavy selling was more a result of the market’s rapid gains this year without a sustained downturn. The Dow crossed 13,000 in late April and pierced 14,000 last week. Even with Thursday’s slide, the Dow this year is up a healthy 1,000 points, or 8.1%.
The 30-stock blue-chip index tumbled 416 points during a trading session in February on fears that a deep sell-off in Chinese markets foreshadowed a global economic downturn, but stocks had recouped their losses about six weeks later.
“When you get a situation like this where stocks are being dumped, it creates a buying opportunity for those people who can buy when their stomachs are churning and when they feel like doing anything but buying,” said Goldman of A.G. Edwards.
Compared with the turmoil on Wall Street, many individual investors were placid Thursday.
Gary Stone, a 45-year-old waiter from Tujunga, has his individual retirement account invested in stock mutual funds. But he said he wasn’t worried about Thursday’s plunge and didn’t intend to adjust his strategy of investing a fixed amount in the market each month.
“Obviously, I like to see the market go up, but when it goes down like this, it doesn’t really bother me. I’m in for the long term,” he said. “I’m not going to jump out of any windows.”
Jerome Posell, a 71-year-old retired attorney from Calabasas, echoed that sentiment.
“In the short term, it means a great deal to me. But over the long term, things have a way of evening out. I am pretty well diversified,” he said. “I am just going to ride it out and see where it takes me.”
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annette.haddad@latimes.com
Times staff writers Jonathan Peterson in Washington and Kathy M. Kristof in Los Angeles contributed to this report.
