For investors who thought the stock market had put the worst of this ruthless year behind it, it’s time to recalibrate.
One of the most brutal downturns in stock market history intensified Wednesday as share prices fell to new lows on fear that the global economic tailspin is deepening.
The Dow Jones industrial average plummeted more than 400 points, closing below 8,000 for the first time since early 2003.
There was no single catalyst, just more of a steady trickle of dispiriting economic news that has gnawed at investors’ psyches.
Home construction declined. Sagging retail prices raised the specter of deflation. The Federal Reserve released a downbeat economic forecast. And Detroit’s automakers again warned of gloom and doom as they begged for lifelines from Washington.
“Every day there’s another batch of negative news on the economy and financial system,” said Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill. “There’s a little bit of hopelessness setting in here.”
The sell-off was led by a huge drop in financial stocks on signs that the woes afflicting banks and brokerage firms are spiraling into the insurance industry as the housing downturn spreads to commercial property.
Shares of Citigroup Inc. cratered 23%, American International Group Inc. fell 20% and even legendary investor Warren Buffett’s Berkshire Hathaway Inc. skidded 12%.
After rebounding from five-year closing lows set Oct. 27, the Dow and other major stock indexes had several times dipped below those lows before pulling off late-in-the-day rebounds that raised hope that the market had reached a “support” level that would trigger bargain hunting.
Now it’s time to look for a new support level.
The Dow on Wednesday tumbled 427.47 points, or 5.1%, to 7,997.28, barreling through its Oct. 27 low of 8,175.77.
The blue-chip index is down 43.5% from its all-time high reached 13 months ago.
The Standard & Poor’s 500 index fared worse, dropping 52.54 points, or 6.1%, to 806.58. It’s down 48.5%, close to eclipsing its 49.1% drop in the 2000-02 bear market.
The Nasdaq composite index slumped 96.85 points, or 6.5%, to 1,386.42. It’s off 51.5% from its October 2007 high.
Treasury yields dropped as investors sought safety. The yield on the three-month T-bill fell to 0.07% from 0.12%.
At the other the end of the spectrum, investors pulled back further from junk bonds. The average yield on an index of junk issues compiled by KDP Investment Advisors rose to 16.69% from 16.2% on Tuesday.
The Labor Department reported Wednesday that the consumer price index fell 1%, the largest drop since the data were first compiled in 1947, triggering fears of deflation, or broadly falling prices, which is much more difficult to arrest than inflation.
The Fed released minutes of its meeting three weeks ago indicating policymakers generally believed the economy would shrink through the middle of 2009.
Shares of General Motors fell 9.7% and Ford Motor tanked 25% as the carmakers pleaded for bailout money.
Insurance stocks were hammered because their own recent efforts to qualify for bailout money sparked worry that their investment holdings may be infested with bad assets.
Lincoln National sank 40%, while Hartford Financial Services Group fell 29%.
Financial stocks in the S&P; 500 sank 11.6%.
Some investors fear that the new lows for stocks could unleash a fresh wave of selling, but not everyone is worried.
Robert W. Bissell, president of Wells Capital Management, said the sell-off had left a swap meet full of bargains.
“I’m looking at really good companies, and they’re 50% where they should be priced,” he said. “It’s a 50%-off sale. It’s the same thing in the stock market as in the department stores.”
Times staff writer Tom Petruno in Los Angeles contributed to this report.