On the 20th anniversary of Wall Street’s worst one-day market crash, stocks tumbled Friday as the confidence that produced record highs just 10 days ago gave way to revived economic worries tied to housing troubles and a stubborn credit crunch.
The Dow Jones industrial average sank almost 367 points, or 2.6%. Last week, many investors surmised that the worst of the fallout from the sub-prime mortgage debacle was over.
But the Dow dropped every day this week as big banks posted billion-dollar mortgage-related losses and top government officials warned about the risks that the depressed home market posed for the overall economy.
And Friday, several large U.S. companies offered downbeat assessments of their business prospects, prompting investors to discard the notion that, despite signs of economic weakness in this country, big American firms could stay healthy by continuing to sell their goods to fast-growing emerging markets overseas.
Caterpillar Inc., a big exporter of earthmovers and other heavy equipment, reported lower-than-expected earnings and cut its 2007 profit forecast. The manufacturer also talked of a recession in the U.S., with the company’s finance chief putting the odds of one in 2008 at “50-50.”
“The Caterpillar announcement calls into question the global growth story,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “It really sent shock waves to investors who viewed Caterpillar as an oasis in the storm.”
The Dow is now down 4.5% from its Oct. 9 record high, putting it about where it was just before the Federal Reserve’s Sept. 18 interest rate cut boosted hopes that a recession could be avoided.
But the major stock indexes are still well above their low points set in August, when the credit crunch set off by mounting home loan defaults was in full flower.
In fact, people who recently received statements showing their 401(k) retirement plan balances up solidly this year through September are probably still in the black for the year -- even after Friday’s decline the Dow is up 8.5% in 2007.
And with the latest bad news comes hope of more help from the central bank. Based on trading in financial instruments linked to interest rates, Wall Street puts the odds of a Fed rate cut at the end of this month at 60%, up from 38% last week.
A prime factor in the stock market’s decline this week was renewed concerns about the global credit markets.
Three major U.S. banks said Monday that they would lead an $80-billion effort to prop up an esoteric class of investment funds that hold devalued mortgage-backed securities.
But instead of reassuring investors, the plan triggered fresh worries about losses not yet reported and the toll the credit crunch could take on the economy.
Adding to the anxiety, former Fed Chairman Alan Greenspan said in an interview published Friday that the banks’ effort might backfire by further undermining confidence.
“It really was a wake-up call that maybe this is a lot more serious than a lot of people thought,” said Michael Metz, chief investment strategist at Oppenheimer Holdings in New York.
Friday’s drop came exactly 20 years after the stock market’s Black Monday crash in 1987, when the Dow fell a record 22.6% in a single day.
Some investment professionals see disquieting similarities between 1987 and today, including a weak dollar, surging commodity prices and a protracted bull market that could be wearing thin. The market also fell sharply on the Friday preceding the infamous Black Monday.
But many experts say there are significant differences between the two periods, calling the timing coincidental.
The markets, however, may be in for further volatility next week when a spate of housing- related data, including home sales, will be released, Ablin said. That could be partly offset if earnings reports expected from technology and pharmaceutical companies are upbeat, he said.
Friday’s sell-off was fueled in part by a growing feeling that corporate earnings, which have expanded at double-digit rates for much of the five-year bull market, may be weakening significantly.
A widespread assumption that profits would bounce back after a weak third quarter is yielding to fears that earnings could fall sharply.
“Caterpillar basically told the world this is just not a one-quarter thing,” said Peter Boockvar, an equity strategist at brokerage Miller Tabak & Co. in New York.
The third-quarter profits that have been reported so far by large public companies are down 1.8% from the third quarter of 2006, triple the decline analysts had expected and the worst showing since early 2002, according to Bloomberg News.
Caterpillar’s stock, one of the 30 components of the Dow Jones industrial average, sank 5.3%. Another industrial titan, Honeywell International Inc., also reported profit that fell short of expectations. Its stock, also part of the Dow, slid 3.9%.
The economic fears prompted many investors to sell stocks and buy Treasury bonds for their perceived safety. With more competition for the government securities, buyers were forced to accept lower interest rates on the debt.
The yield on the benchmark 10-year Treasury note slid to 4.39%, down from 4.49% late Thursday and 4.68% at the end of last week.
Because fixed-rate mortgages often are pegged to the 10-year note, the drop in its yield provides some hope that borrowing costs for home buyers could fall as well.