OCTOBER 15, 2008, 5:47 P.M. ET
Dire economic data knocked stocks sharply lower Wednesday, with the S&P 500 posting its worst single-day percentage decline since Black Monday 1987, as investors braced themselves for an ugly recession.
The session’s drop rekindled debate on Wall Street about whether last week’s lows will hold up. Increasingly, it seems the record 936-point gain registered by the Dow Jones Industrial Average Monday wasn’t enough to put the market on sure footing.
“I don’t just think we’re going to test the lows. I think we’re going to violate them and break lower in a big way,” said Kent Engelke, managing director at the brokerage Capitol Securities Management, in Richmond, Va. Referring to the possible fallout in the broader economy from the credit crisis, he added: “We don’t yet know what that is, because this situation is so unprecedented. Every road sign has been obliterated.”
The Dow’s losses accelerated as the closing bell approached, leaving the blue-chip measure down 733.08 points for the day, off 7.9%, at 8577.91, hurt by losses in twenty-nine of its 30 components. The only exception was Coca-Cola, which climbed 1.1% after posting a strong profit report. The Dow has retraced more than half of its point gain between Friday’s low and Monday’s close. The decline Wednesday was the worst on a percentage basis since Oct. 26, 1987.
Citigroup and American Express each fell about 13%. The Dow’s energy and raw-materials names were also at the forefront of the selloff amid fears that a U.S. slowdown will hurt the global economy and, in turn, lead to lower demand for an array of commodities. Alcoa was off 12.8%. Chevron and Exxon Mobil each fell more than 12% as oil prices hit their low for 2008, settling below $75 a barrel. Other commodities suffered on worry about falling industrial demand. The Dow Jones-AIG Commodity Index fell 4.3%.
Markets were hit with a stampede of selling during the final hour. Traders said some fund managers are unloading stocks to raise money for redemptions from investors burned in the recent selloff.
“We continue to see a vortex of selling, led by a levered, scared hedge fund community stepping on each other trying to get in front of the other guy to liquidate, based upon the real investment losses that they’ve experienced, coupled with the threat of year-end redemptions,” said Doug Kass, president of Seabreeze Partners.
The S&P 500 plunged 9% — its worst percentage slide since the 20.47% plunge recorded on Black Monday — to 907.84. Basic materials, energy, and consumer discretionary dropped sharply. The Nasdaq Composite Index declined 8.5% to 1628.33. The tech-rich benchmark has lost more than a quarter of its value over the past 14 days. The small-stock Russell 2000 was off 9.5% at 502.11, for the largest one-day drop in its history.
The Chicago Board Options Exchange Volatility Index, a popular fear gauge for the stock market, surged 26% to 69.25.
A cluster of disappointing economic reports set a downbeat tone for the market. Retail sales fell 1.2% last month, the worst slide in three years. A report on New York factory activity was bleak, and core wholesale prices surged, suggesting earnings could be pressured by still-high expenses and declining demand. The Federal Reserve’s beige book of regional economic indicators showed the job market and business activity weakening throughout the U.S.
In a speech to the Economic Club of New York, Fed Chairman Ben Bernanke said recent efforts by the central bank and other government agencies represent “powerful steps” to resolve Wall Street’s crisis. Mr. Bernanke said that policy makers have avoided the “critical errors” made by their counterparts during the Great Depression.
Peter Cardillo, chief market economist at Avalon Partners in New York, fretted at the comparison of the current crisis to the Depression. Many commentators have drawn such comparisons recently, but for the Fed chairman himself to do so struck Mr. Cardillo as worrisome.
Traders on the New York Stock Exchange’s floor said that the market’s losses seemed to feed on themselves late in the day. As hedge funds and other players racked up losses, their brokers issued margin calls. That sparked more selling to raise cash — a pattern that has played out on other days lately when the market has suffered steep drops.
“Yesterday, that [type of selling] was starting to dissipate — a small sign of hope,” said Andrew Frankel, co-president of Stuart Frankel & Co., a New York floor brokerage. “But today we’ve seen a return.”
There were lingering signs of upset in the credit markets. Libor rates continued to ease, but risk premiums on agency debt widened sharply. Treasurys moved higher, in a hint that many investors remain in a defensive mood amid the bleak backdrop. Three-month Treasury yields hovered near 0.2%, down from more than 0.3% late Tuesday.
Underlining the general sense of malaise, gold prices rose. Gold futures were up $8.20 at $847.70 per ounce in New York.
The dollar was mixed against major rivals. One euro cost $1.3495, down from $1.3654. A dollar bought 100.12 Japanese yen, down from 102.04 yen.