Facing up to the downturn

Times Staff Writers

Just 19 more days like Tuesday and the Dow Jones industrial average will be at zero. And we can all start over from scratch.

Stocks were hammered a second straight day by what many traders described as desperation selling.

The Dow lost 508.39 points, or 5.1%, to 9,447.11, its lowest close since September 2003.

We said goodbye to Dow 10,000 on Monday. On Tuesday, the Standard & Poor’s 500 index closed below the 1,000 mark for the first time in five years, tumbling 60.66 points, or 5.7%, to 996.23. Today, shares in Asia dropped 8%.


The severity of Wall Street’s decline over the last 2 1/2 weeks has been breathtaking. By the classic bear market yardstick -- a minimum 20% drop in a major stock index -- the S&P; 500 now has experienced a bear market in just 12 trading sessions: The index has fallen 21% since Sept. 19.

That would be a bear-within-a-bear. Measured from its record high a year ago, the S&P; is down 36%, making it the fourth-worst market decline since the late 1930s.

Although investors are fearful because of the credit crunch, selling of this magnitude seems to be disconnected from economic fundamentals.

Art Hogan, veteran analyst at Jefferies & Co. in Boston, noted the relatively uniform percentage declines in broad market indexes Tuesday: 5.4% in the New York Stock Exchange composite index, 5.6% in the S&P; small-stock index, 5.8% in the Nasdaq composite.

“That tells you it’s just waves of people selling everything that’s traded,” he said.

Who is so desperate to get out? Many analysts point to hedge fund managers, who are believed to be facing another round of massive redemption notices from clients who want their cash back. “You’re seeing selling by people whose hands are forced now,” said Christopher Johnson, head of Johnson Research Group in Cincinnati.

Ditto for stock mutual fund managers, as retail investors join the exodus.

Then throw in gun-to-the-head selling by investors who bought stock on margin and now are facing margin calls by their lenders -- demands to put up more cash to offset the tumbling value of their portfolios.


Everyone’s looking for signs of capitulation -- a final deluge of selling by investors too disgusted and demoralized to hold on any longer. “Bottoms don’t happen until everyone walks away,” Johnson said.

The last two days certainly have had the feel of capitulation.

But some analysts say there still are too many market pros reluctant to exit stocks because they’re sure a bottom is near. Mark Hulbert, who tracks investment newsletters, wrote early Tuesday on that Monday’s market dive -- which saw the Dow off 800 points before recovering about half that loss -- probably was a capitulation false alarm.

“An eagerness to declare that capitulation has occurred probably means that it hasn’t,” Hulbert wrote.


Share prices rose early Tuesday after the Federal Reserve announced a plan to thaw the market for commercial paper, short-term debt issued by many companies.

Investors also were encouraged by comments by Federal Reserve Chairman Ben S. Bernanke hinting that the central bank might cut interest rates soon. But the enthusiasm was short-lived as concerns about the softening global economy returned to the forefront.

Stocks that are tied closely to the economic cycle -- including energy, technology and consumer shares -- were hit hard. The financial sector was the biggest loser, falling 12%.

Leading the way down was Bank of America, which plunged 26% after announcing late Monday that it would halve its dividend and sell new stock to cope with rising loan losses.


The credit markets showed signs of easing after the Fed said it would stand ready to buy up commercial paper to break a logjam in that market.

Yields on Treasury securities rose as investors felt confident enough to begin to reverse their flight into the super-safe instruments.

“It remains to be seen how many more steps will be needed,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald in New York. “But this was a big step toward soothing the concerns that were floating around regarding corporate America.”