Some key indexes hit bear trap
The stock market’s already-brutal start to the new year grew even worse Thursday, driving some major indexes into bear-market territory as fear of a recession unleashed another barrage of selling.
The market fell steadily through the day after Merrill Lynch & Co. reported a nearly $10-billion fourth-quarter loss and a regional manufacturing report pointed to contraction in the sector.
Not even the endorsement of an economic stimulus plan by Federal Reserve chief Ben S. Bernanke could ease investor anxiety.
The day was marked by furious trading and a sharp surge in volatility as investors dumped many of the biggest and most liquid stocks.
“It was a purge,” John Bollinger, head of Bollinger Capital Management in Manhattan Beach, said, calling the drop “a graphic demonstration of the fear” in the market.
The Dow Jones industrial average had its worst day in two months, sinking 306.95 points, or 2.5%, to 12,159.21 -- its lowest level since March. It is down 8.3% since the start of the year.
The Standard & Poor’s 500 index dived 39.95 points, or 2.9%, to 1,333.25 -- its lowest close since October 2006. The index is off 9.2% this month.
Bernanke, testifying on Capitol Hill, again signaled that the Fed would cut short-term interest rates further, and said he could support bipartisan proposals to boost the economy with fiscal stimulus measures.
But his comments were overshadowed by the latest economic data. And stocks sold off during Bernanke’s testimony as some investors appeared to feel that the Fed chief’s commitment to staving off recession wasn’t forceful enough.
“The testimony was probably not as encouraging as it could have been,” said A.C. Moore, investment strategist at Dunvegan Associates Inc. in Santa Barbara. “It was not a to-the-rescue type of message.”
The Federal Reserve Bank of Philadelphia released a survey indicating that manufacturing activity in that region fell dramatically this month, suggesting the economy was at risk of an actual contraction, not just a slowdown. Also unhelpful was a report that housing starts tumbled a worse-than-expected 14.2% last month to their lowest seasonally adjusted level since 1991.
Investors again fled to Treasury securities for safety, driving yields sharply lower.
The two-year T-note yield sank to 2.4%, its lowest level since 2004, from 2.51% on Wednesday. The 10-year T-note hit its lowest yield since 2003, falling to 3.63% from 3.74%.
Rumors again were rife in the bond market that the Federal Reserve would make an emergency cut in its key short-term rate rather than wait for its Jan. 29-30 meeting.
From the bond market’s perspective, “it’s hard to overstate how grim the situation is,” said T.J. Marta, fixed-income strategist at RBC Capital Markets.
In the stock market, the decline began early in the session and continued until the closing bell. Every rally attempt was quickly swamped by more selling. Losers outnumbered winners by nearly 6 to 1 on the New York Stock Exchange.
The Dow index now is down 14.2% from its record high of 14,164.53, reached Oct. 9.
The S&P; 500 is down 14.8% from its record high.
A pullback of 10% to 15% in major indexes is considered a “correction” in an ongoing bull market. When the decline exceeds 15%, Wall Street begins to fear that a new bear market is underway. Typically, a bear market is said to have begun when an index is down 20% or more from its high.
The last bear market ran from 2000 to 2002 after the dot-com bubble burst. Stocks have been in a bull market since then.
But some market sectors already are in a new bear phase, using the classic definition.
The Russell 2,000 index of small stocks dived 19.34 points, or 2.8%, to 680.57, leaving it down 20.5% from its record high set in July. The Dow transportation stock index, off 2.6% on Thursday, is down 24% from its peak.
Although the Dow industrials are down less than 20%, some investors said the bull market no doubt had ended.
“Unfortunately I don’t see any quick resolution to this,” said Brian Barish, president of Cambiar Investors in Denver.
“It is what it is,” he said. “It’s a bear market.”
In other market highlights:
* Shares of bond insurers MBIA and Ambac Financial Group plummeted further on fears that they might lose their AAA credit ratings because of exposure to sub-prime mortgages. MBIA sank $4.18, or 31%, to $9.22. Ambac plunged $6.73, or 52%, to $6.24.
* The technology-heavy Nasdaq composite index fell 47.69 points, or 2%, to 2,346.90.
* The dollar fell modestly against other major currencies while gold edged down $1.10 to $879.50 an ounce. Oil futures slipped 71 cents to $90.13 a barrel.
* Wall Street’s woes pulled the Canadian market down 2.1%, Brazil down 3% and Mexico down 2.4%.
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tom.petruno@latimes.com
