Fear drops stocks to 1997 levels

By Walter Hamilton and Tom Petruno

Feb. 24, 2009 12 AM PT

NEW YORK AND LOS ANGELES —

The U.S. stock market Monday slumped to its lowest level in more than a decade as investors despaired over the troubles afflicting the financial system and the government’s inability thus far to prescribe a cure.

Wall Street’s losses punctuated a decline that has gripped the market in the opening weeks of this year and extended one of the worst-ever bear markets to 16 months -- raising fears that stocks could be heading for an even more precipitous drop.

A week ago, the Dow Jones industrial average of 30 blue-chip stocks and the broader Standard & Poor’s 500 index held just above their lows reached in November as the credit crisis deepened.

But after falling further last week, the indexes on Monday surrendered the last of this decade’s gains, sliding to levels last seen in 1997. The Dow sank 3.4%, and the S&P; 500 skidded 3.5%. The declines triggered renewed losses in Asian markets early today.

A wave of selling that picked up steam in the last two weeks has been fanned by worry that the outlooks for the economy and the banking industry are growing more dire and that the government’s attempted remedies have been too scattershot to be effective.

The latest plunge has dashed the hopes of optimists who thought the worst had passed last fall, when the market collapsed in a spasm of selling. And it has added to the angst of individual investors saddled with stark losses in retirement accounts and college savings plans.

“There is frustration and anger for a lot of people,” said Jon Najarian, a veteran stock trader in Chicago.

The grinding bear market already had shaken the faith of a generation of small investors who were steeped in the belief that the most reliable path to a comfortable lifestyle was through stock-heavy portfolios.

Many financial advisors acknowledge that their individual investor clients have been calling them in recent days, wondering if they should sell all or much of their remaining stock holdings rather than risk further losses.

The client fear factor “tells me we are near the level of panic,” said David Kotok, head of money manager Cumberland Advisors. The Vineland, N.J., firm oversees nearly $1 billion for 1,300 wealthy individuals and families.

Yet after what is now a lost decade for stocks, some analysts say the market is showing increasing signs of bottoming, with the S&P; 500 index down 52.5% from its all-time high reached in October 2007.

Others, however, worry that share prices could be poised for another heart-wrenching drop.

The Nasdaq composite index, dominated by technology companies, plunged 78% during the dot-com crash of 2000 to 2002.

“I don’t want to sound like the grim reaper, but it’s possible that one of these major averages could come down by that amount, which would be another 50% drop from here,” said Kevin Marder of Marder Investment Advisors Corp. in Los Angeles.

“I’m not predicting that will happen, but it’s certainly not out of the question.”

One key issue, of course, is the deep recession, which has devastated corporate earnings, undermining share prices of many of the country’s biggest and best-known companies.

So far, investors have appeared unimpressed by the Obama administration’s $787-billion economic stimulus plan. What’s more, some Wall Street pros say the administration has been slow to formulate a comprehensive plan for breathing life into the stricken banking sector.

Investors were disappointed two weeks ago, when a bank rescue speech by Treasury Secretary Timothy F. Geithner, billed as a major policy address, was light on details. On Monday, the broad market sank even as federal financial regulators pledged that the government was “standing firmly behind the banking system.”

“The government lacks credibility at this point on the issue of the banks,” said Nancy Bush, an analyst at NAB Research in Annandale, N.J. “It’s that simple.”

A major fear has been that the government would at least temporarily nationalize one or more major banks, wiping out shareholders in the process.

“People need to hear very clearly that there is no plan to nationalize the banks,” said Robert W. Bissell, president of Wells Capital Management in Los Angeles. “Until people hear specifics and clarity, they’re going to remain skeptical.”

On Monday, Citigroup Inc., a Goliath of the banking sector, was reportedly negotiating to have the federal government further bolster its finances. JPMorgan Chase & Co., one of the industry’s healthiest institutions, unexpectedly slashed its quarterly dividend 87%.

But JPMorgan also issued an upbeat projection of its first-quarter financial results, and its shares rose in after-hours trading.

Near the end of the regular session, the market was hammered by rumors that insurer American International Group Inc. may report a stunning $60-billion quarterly loss that could force the government to boost the size of the $150-billion rescue package it already has extended to the company.

Although the stock market has continued to slide this year, the current downturn stands in sharp contrast to the wild volatility seen last fall as the credit crisis worsened.

In November alone, the S&P; 500 index rose or fell more than 5% on eight of the month’s 19 trading days. So far this year, the index has recorded just one session with a move of more than 5%.

But if the bear market’s latest phase is stealthier, it is no less painful for investors’ portfolios. The S&P; 500 index has lost 17.7% year to date, nearly half of the 38.5% drop for all of 2008.

On Monday, the Dow gave up 250.89 points to close at 7,114.78. The S&P; shriveled 26.72 points to 743.33. In the last six trading days, the S&P; has fallen 10%, while the Dow is off 9%.

“This is a slow-drip, slow-death decline,” said Joe Saluzzi, a partner at brokerage Themis Trading in Chatham, N.J. “These are the ones that really wear you down.”

But Cumberland’s Kotok said he believed that the stock market still was in a “bottoming process,” even though the Dow and the S&P; 500 have fallen through their 2008 lows.

After climactic sell-offs like the one that startled Wall Street in November, it isn’t unusual for the market to bounce a bit, then head back down and even temporarily pierce the previous lows, analysts note.

Market optimists pointed out that other broad indexes, such as the Nasdaq composite, still are above their November nadirs.

What’s more, they said, even though the economy continues to contract, conditions in the financial system have improved somewhat since the fall.

“The credit markets are recovering,” said Bill Knapp, strategist for MainStay Investments in New York. For example, a growing number of companies and municipalities have been able to issue bonds this year to pay off older debt or to raise cash to fund their operations.

Still, some veteran investors warn against underestimating the risks the financial markets face from the soaring loan losses that have already brought down some of the world’s biggest lenders and brokerages.

“We witnessed the collapse of the financial system” beginning last year, financier George Soros said at a Columbia University dinner last week. “It was placed on life support, and it’s still on life support.”

walter.hamilton@latimes.com

tom.petruno@latimes.com

Times staff writer Martin Zimmerman in Los Angeles contributed to this report.

(BEGIN TEXT OF INFOBOX)

Deep losses in blue chips

How the bear market has ravaged shares of some of the best-known U.S. companies:

Declines from 2007-08 highs through Monday

Bank of America: 93%

Alcoa: 88%

Nordstrom: 81%

General Electric: 79%

Wells Fargo: 72%