Stocks nosedive as Europe’s woes mount


One of the wildest days in stock market history left investors deeply shaken Thursday, with some fearful that another chapter in the global financial crisis was about to unfold.

After sliding through the morning on widening concerns that European governments’ debt woes would spread, stocks fell off a cliff late in the day.

The Dow Jones index plummeted more than 700 points in just 15 minutes — and at its low was down nearly 1,000 points — before recouping much of that loss just as quickly.

The speed and depth of the sell-off led many analysts to conclude that trading glitches or errors, compounded by computerized selling, were to blame for the extraordinarily volatile session. But even with its late rebound, the Dow finished down 347.80 points, or 3.2%, at 10,520.32.

“Once it gets going it has a mind of its own, like a wild animal,” Bill Strazzullo, a veteran trader at Bell Curve Trading in Freehold, N.J., said of automated trading programs.

Among average investors, that could reinforce the impression that Wall Street had created a monster that neither it nor its regulators could control.

The day’s extreme decline also immediately revived memories of the market collapse that began in September 2008 after the failure of brokerage Lehman Bros. caused the global financial system to seize up. That fueled the worst economic decline since the Great Depression.

“People are terrified. They’re saying, ‘I don’t want to go through another Lehman crisis,’ ” said David Kotok, head of investment firm Cumberland Advisors  in Vineland, N.J.

Many analysts agreed that the panicked selling was rooted in the worsening situation in Europe’s financial markets, where the crisis of confidence fueled by the Greek government’s debt woes has spread to engulf Portugal, Spain and other countries in recent days.

Some experts also pointed to the U.S. Senate vote late Wednesday that would bar future use of taxpayer money to bail out failing financial institutions. Amid increasing rumors that banks in Europe are having trouble raising short-term funds because of concerns about their financial health, the Senate vote raised the risk that the federal government could be hamstrung in dealing with a spillover of Europe’s turmoil into the U.S. banking system.

Still, the breathtaking speed of the market’s slide Thursday was driven by computerized trading that caused a cascade of automatic selling as the machines took over — reprising not only the worst days of the 2008-09 plunge but also the 22.6% crash in the Dow on Oct. 19, 1987, the biggest one-day loss in history.

In the immediate aftermath of the market’s dramatic dive and snapback on Thursday, rumors blanketed Wall Street as to what triggered the late-day plunge.

One rumor was that a trader at Citigroup had accidentally entered an erroneous trade to sell billions of shares of consumer products giant Procter & Gamble, rather than millions of shares. P&G, one of the 30 stocks in the Dow index, plummeted from about $61 a share around 11:40 a.m. PDT to as low as $39.37 by 11:46, before suddenly shooting higher.

Citigroup quickly denied responsibility.

“We, along with the rest of the financial industry, are investigating to find the source of today’s market volatility,” Stephen Cohen, a Citi spokesman, said in a statement. “At this point we have no evidence that Citi was involved in any erroneous transaction.”

The New York Stock Exchange said that it had safeguards in place that slowed and then fully stopped trading in Procter & Gamble for 90 seconds as the stock collapsed. But during that stoppage at the NYSE trading moved to other exchanges, including the Nasdaq market.

A Nasdaq spokesman said the market had “no technology or system issues” associated with the wild trading, but that it would cancel certain trades that occurred at rock-bottom prices at the markets’ brief nadir.

In Washington, the Securities and Exchange Commission said it was reviewing the day’s trading.

U.S. markets have overall “circuit breakers” that stop all trading if prices fall a certain amount. But the main circuit-breaker currently requires a drop of 1,050 points in the Dow before 11:30 a.m. PDT. The Dow’s loss didn’t reach that level and, in any case, the worst of the decline came after that time cutoff Thursday.

James Angel, an expert in financial markets at Georgetown University, said the day’s manic trading showed that U.S. market regulation hasn’t kept up with the speed of technological advances in the trading world.

“We are dangerously unprepared for a massive computer glitch of this type,” Angel said. “The problem is that computers can trade so fast that enormous damage can be done in the minute or two it takes the humans to wake up.”

Even as traders struggled to explain the day’s frantic action, analysts were focusing on the potential fallout.

In recent weeks, as U.S. stocks have largely held up even as Europe’s debt crisis has deepened, many analysts have warned that the market was primed for a pullback.

For the Dow, which rose 71% from its 12-year low in March 2009 to its recent peak of 11,205 on April 26, a drop of 10% to 15% would constitute a normal “correction” that would allow some investors to take profits and others who’ve been on the sidelines to get in at lower prices.

After Thursday’s astounding swings, however, the question is whether many potential buyers now will be too afraid to jump in. Although the Dow is down a modest 6.1% from its recent high, the average stock on the NYSE now is down 9.3% from its April high.

Some sidelined investors “aren’t going to buy now,” said Bruce Bittles, market strategist at brokerage Robert Baird & Co. in Nashville, Tenn. “Too much damage has been done” to investors’ psyches, he said.

If stocks were to continue to slide the effect could be to underline undermine the economic recovery by causing some consumers and companies to pull back from spending.

Patrick Becker, head of Becker Capital Management in Portland, Ore., said he had been buying stocks in recent weeks and hoped to add more to his $2-billion portfolio. He said he expected the U.S. economy to stay on a recovery path, and doubted that the financial system was at risk of repeating the calamity of late 2008.

“In the U.S., we’re not talking about a systemic failure,” Becker said.

But many market pros also warned that the situation in Europe had grown dire and that the increasing risk was that Europe’s woes would feed into the U.S. financial system — just as U.S. banks’ losses on toxic mortgage investments fed into Europe’s financial system in 2008.

One crucial issue is that European banks own massive amounts of bonds issued by Greece, Portugal and Spain. Investors have turned against those countries on worries that they might default on their debts. As the bonds fall in value the losses undermine the financial health of the banks.

One hope had been that the European Central Bank, which met Thursday, would say that it was willing to buy European government bonds for its own account, in the same way that the U.S. Federal Reserve last year bought Treasury securities.

But ECB President Jean-Claude Trichet said after the bank’s meeting that the idea wasn’t discussed. That triggered fresh selling in the euro currency and drove European stocks down again.

“Trichet did not say or do anything to stop the rot” in the markets, said Marc Chandler, chief currency strategist at Brown Bros. Harriman & Co. in New York.