Another basting for Wall Street

By Walter Hamilton

Nov. 22, 2007 12 AM PT

Times Staff Writer

Investors had little to give thanks for Wednesday as a sharp drop in stock prices pushed the benchmark Standard & Poor’s 500 index into negative territory for the year.

The market gave in to a late-day sell-off as the long holiday weekend approached, pulling both the S&P; 500 and the Dow Jones industrial average down 1.6%, as investors exhibited more pessimism about the economy than forecasters have been displaying.

“Worries that the economy is sliding into recession are intensifying with every passing day,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y.

The S&P;, which fell 22.93 points to 1,416.77, is now down 0.1% for the year. Counting dividends, however, it is up 1.6%.

The Dow sank 211.10 points Wednesday to a seven-month low of 12,799.04. That put it below its mid-August closing low reached in the first throes of the credit crunch.

With Wednesday’s slide, stocks have fallen in eight of the last 11 sessions.

Composed of the stocks of 30 huge companies, the Dow is the most widely quoted stock gauge. But the travails of the broader S&P; 500 have a more direct effect on millions of Americans whose funds in 401(k) or other investment accounts are tied to its performance. The drop means that most of their contributions this year are underwater.

Both indexes are down nearly 10% from their record highs set Oct. 9. Such a double-digit fall would be considered by many to mark a “correction” in a bull market. A decline of 20% or more is said to denote a bear market.

Foreign markets, a popular destination for many Americans’ money this year, also had a dismal day. Key stock indexes were down 4.2% in Hong Kong, 2.1% in Mexico and 1.5% in Germany. Those markets, however, have been easily outperforming U.S. stocks year to date, posting gains ranging from 7.6% in Mexico to 33% in Hong Kong.

Nervous investors dumped stocks in favor of the perceived safety of Treasury bonds. The yield on the 10-year Treasury note briefly fell below 4% for the first time since 2005 before ending at 4.01%, down from 4.1% late Tuesday. The yield on the two-year note dipped under 3% for the first time since 2004, finishing at 3%, down from 3.2% Tuesday.

The decline in stocks was exacerbated as many investors sought to lighten their portfolios before the Thanksgiving holiday.

Still, the drop indicated how much a litany of dreary news from the housing and financial sectors has discouraged investors.

The Federal Reserve and many private forecasters predict the economy will avoid a recession, though they say that growth will be sluggish into next year.

But investors are acting as though a recession were a virtual certainty, Johnson said.

Reflecting that sentiment, sectors that held up well this year, such as technology and basic materials, have recently come under selling pressure.

Investors “seem to be saying there’s more to this [economic downturn] than housing,” Johnson said.

Fears were fanned by a report showing that the index of leading economic indicators declined more than expected last month. And a survey showed a drop in consumer sentiment to its lowest level in two years -- bad news for retailers, with the holiday shopping season about to start.

Oil prices dropped but not before spiking above $99 a barrel early in the day. Crude futures closed at $97.29, down 74 cents, on the New York Mercantile Exchange.

The prospect of a weakening U.S. economy weighed on the dollar, which lost ground against other major currencies. Gold prices rose.

Financial shares in the S&P; 500 fell for a sixth straight day, losing 2.2% as a group.

Freddie Mac, which plummeted 29% on Tuesday after the mortgage finance giant reported a $2-billion loss, fell 74 cents, or 2.8%, on Wednesday to $26. But Fannie Mae, which plunged 25% on Tuesday in sympathy with Freddie Mac, rose 98 cents, or 3.5%, to $29.23. Countrywide Financial fell 86 cents, or 8.4%, to $9.42, putting the home-loan company’s stock down 78% this year.

Citigroup fell 67 cents, or 2.1%, to $30.73. JPMorgan Chase fell 95 cents, or 2.3%, to $40.68. Securities firm Goldman Sachs Group fell $7.98, or 3.7%, to $209.50.

Shares of Bear Stearns and insurance giant American International Group slumped after their directors and top executives were sued by investors who claimed they were deceived about each company’s sub-prime mortgage investments.

Bear Stearns fell $2.59, or 2.8%, to $91.28. AIG dropped $3.11, or 5.7%, to $51.33.

An index of home builders sank 5.5% after a real estate industry report showed the number of homes sold in the third quarter down 14% from a year earlier.

Pulte Homes fell $1.35, or 13%, to $9.25. Meritage Homes sank 90 cents, or 6%, to $14.20.

The barrage of bad news has left investors hesitant to jump into the market, said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.

“It’s like a tropical storm off the coast,” Ablin said. “We’re preparing for it now, but it’s hard to tell how hard it’s going to hit us and how much impact it will have.”

In other market highlights:

* The Nasdaq composite index fell 34.66 points, or 1.3%, to 2,562.15. The index is down 10.4% from its Oct. 31 peak but up 6.1% this year.

* The Russell 2,000 index of smaller-company stocks, which fell 1.2% on Wednesday, is down 6% since the start of the year and 13.5% from its July 13 high.

* Declining issues outnumbered advancers by 3 to 1 on the New York Stock Exchange.

* Circuit City shares plunged 32 cents, or 5.6%, to $5.45 after a JPMorgan analyst downgraded the stock to “neutral.”

* U.S. stock markets will be open half a day Friday, with trading ending at 10 a.m. Pacific time.

walter.hamilton@latimes.com

Times wire services were used in compiling this report.

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Index scorecard

Year-to-date price changes in key stock indexes:

Nasdaq compos.

+6.1%

NYSE compos.

+2.9