Continued fall undoes years of gains, batters hopes

Petruno and Hamilton are Times staff writers.

An intensifying panic has gripped the stock market, sending share prices to new depths and leaving investors afraid that they’ll never be able to recoup their losses.

The latest teeth-gnashing plunge Thursday virtually wiped out the remaining gains from the five-year bull market that began in 2002.

With the news dominated by grim economic data, including a 16-year high in weekly unemployment claims and the failure of Congress to reach a deal to help U.S. automakers, the Dow Jones industrial average sank almost 450 points -- its eighth triple-digit drop in 12 trading days.

The sell-off yanked the broad Standard & Poor’s 500 stock index down 6.7% to its lowest point since 1997. The benchmark index, which is tracked by many mutual funds owned by individual investors, is down 52% from its all-time high reached 13 months ago. It’s the sharpest decline since the Great Depression.


The descent in recent days, coming after investors had already endured brutal losses over the last year, reflected a sell-at-any-cost negativity pervading the market.

“People are saying, ‘If I can salvage 50% of my money, it’s better than having nothing left,’ ” said Sam Stovall, chief investment strategist at Standard & Poor’s Corp. “It’s emotions driving it all.”

Thursday’s sell-off played out as many others have recently, with the market succumbing to a feverish collapse late in the day that left Wall Street professionals hard-pressed to conjecture when share prices might stabilize.

Although the recent bailouts of banks and other financial firms by governments worldwide have eased worries about the stability of the global financial system, investors now fear that the economy is headed for its worst downturn since the 1930s.

For those who have held on, guided by the conventional advice against selling when the market is down, the losses have been staggering.

“It’s wiping out all the retirement savings in all the 401(k) plans,” said Bill Buechler, president of Buechler Capital Asset Management in La Jolla. “We’ll have a whole generation of people whose retirement plans have been wiped out.”

With the S&P; 500 index now down 52% from its peak, it would have to rise 108% just to recoup its losses.

The Dow sank 444.99 points Thursday, or 5.6%, to close at 7,552.29. It has fallen 30% in the last month and a half and 47% since its October 2007 peak. That far surpasses the index’s 38% drop in the two-year bear market that followed the late-1990s dot-com bubble.


“At this point, you walk in every day just wondering how much more it’s going to go down,” said Dan McMahon, head of equity trading at Raymond James & Associates.

One driver of the market’s slide since mid-September has been forced selling by investors, such as hedge funds, that had borrowed money to make market bets. As skittish lenders have tightened credit and called in loans, the funds have had to dump stocks to raise cash.

What’s more, the wealthy investors who had poured record sums into hedge funds have increasingly been demanding their money back as losses mount. Investors pulled $40 billion from such funds in October alone, according to Hedge Fund Research Inc.

The dumping of shares by hedge funds has made other investors reluctant to step up and buy, fearful of getting in the way of another torrent of sell orders.


“A lot of the bigger market players are sitting on the sidelines,” said Gail Dudack, head of Dudack Research Group in New York.

Economists worry that the stock-market losses have become so severe that they will assure a painful and long-lasting recession because of the “negative wealth effect”: As their investment accounts, including savings in 401(k) plans, sink in value, many people are likely to further pare back spending.

“It’s an erosion of wealth that in turn hurts the economy,” said Allen Sinai, president of Decision Economics Inc. in New York.

The effect is amplified by the collapse of real estate prices, which has slashed or wiped out many homeowners’ equity.


Although the stock market has suffered numerous temporary declines since World War II, none has been accompanied by a housing downturn comparable to the current one.

Oil prices responded to the dark economic outlook Thursday, closing below $50 a barrel for the first time since 2005. Crude futures fell $4 to $49.62 a barrel, down from almost $150 four months ago. Some analysts now say oil could drop as low as $30 a barrel.

The credit markets also are being thrashed anew as investors flee corporate and mortgage bonds and seek refuge in supersafe U.S. government securities, sending their yields to historic lows. On Thursday, the yield on the two-year Treasury note dropped below 1% for the first time.

“We’re in a panic mode now,” said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management in New York.


In the stock market, shares of financial companies battered by mortgage losses have led the way down over the last year, and Thursday saw more of the same. An index of major financial stocks plunged 11%, with investors now focusing on the potential for losses to spread to commercial real estate loans and corporate loans as the economy worsens.

Shares of banking giant Citigroup Inc. tumbled 26% as some investors bet it would require a federal rescue -- even though it received a $25-billion capital infusion from the government in October.

Few stocks have been spared by the market’s dive this year.

This week alone, shares of Berkshire Hathaway Inc., the holding company controlled by legendary investor Warren Buffett, have plummeted 23% to a five-year low.


Four weeks ago, Buffett wrote an opinion piece in the New York Times exhorting Americans to buy stocks, saying that “fears regarding the long-term prosperity of the nation’s many sound companies make no sense.”

Since the article was published, the Dow has dropped 15%.

Some analysts argue that the market’s misery offers an extraordinary buying opportunity for long-term investors, if they have cash available. But that assertion has been made many times before in this bear market, and investors who jumped in have been punished by the relentless decline.

The mood is that “the stock market only has one direction now, and that’s lower,” Buechler said. “Why buy today if you can buy it cheaper tomorrow?”





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