Misery in the markets
Plunge in Asian stocks spurs a huge sell-off on Wall Street
Wall Street yesterday experienced its biggest one-day sell-off since the terrorist attacks of 2001, sparked by an overnight plunge in Chinese and other Asian markets and fueled during the day by rising oil prices and new evidence of weakening US economy.
The Dow Jones industrial average plummeted by as much as 546 points -- the greatest point decline since the first day of trading following the terrorist attacks of Sept. 11, 2001 -- before recovering more than 100 points in the final hours of trading.
Investors received a rude shock around 3 p.m. Eastern time, when the Dow appeared to drop more than 200 points in 10 minutes. After the markets closed, Dow Jones & Co., which maintains the average, said the sharp falloff was the product of a computer overload brought on by heavy trading volume. The decline was real, but more gradual, occurring over the space of an hour, rather than minutes.
Still, the Dow ended the day down 416 points, the seventh biggest point decline at closing in the Dow's history. The index of 30 leading companies also experienced its biggest percentage decline since the beginning of the Iraq War in 2003, losing 3.3 percent to close at 12,216.24. The percentage drop, however, was far from the record 22.6 percent drop on Oct. 19, 1987, known as Black Friday.
Other US stock market indexes mirrored the Dow's decline. The broader Standard & Poor's index of 500 stocks fell 3.5 percent, or 50.33, to close at 1,399.04, and the technology-heavy Nasdaq Composite Index plunged nearly 4 percent, losing 96.66 points to close at 2,407.86.
"Panic," is how Al Goldman, chief market strategist for A.G. Edwards & Sons Inc. of St. Louis, described the sell-off yesterday.
"This is the short-term correction that everybody was anticipating," Goldman said. "The market is made up of fellow human beings, who act because of fear or greed, and today it was definitely fear."
Several analysts agreed that stock markets were due to fall sharply, after moving relentlessly higher since the summer. Even as evidence has mounted that the US economy was slowing, the Dow reached one record close after another. Investments were becoming increasingly speculative, pulling away from fundamentals, such as stronger economic growth, that are needed to support the higher prices.
"Given how sluggish the economy has been, I've been amazed at how high stock prices have been," said Nariman Behravesh, chief economist at Global Insight, the Waltham forecasting firm.
The economy doesn't appear to be falling into recession, but it is nonetheless growing at a much slower pace than in recent years, he said. Essentially, analysts said, stock markets have to wait for the economy to catch up.
How long that will take is unclear. Historically, stocks have typically rebounded quickly after big losses . The Dow has suffered six 400-point losses in its history, and it has rallied on the day after more than 80 percent of the time.
Last night, Asian markets showed signs of stabilizing. In Tokyo, after an initial sell-off, stock prices leveled. In China and Hong Kong, additional losses were modest.
But Mark Zandi, chief economist at Moody's Economy.com, a forecasting firm in West Chester, Pa., said this correction could last months.
"Fundamentally, the economy is strong, but this sell-off has exposed some of the cracks in foundation," said Zandi, citing the weak housing market as one example. "This correction is not going to be a day. The market is going to trade sideways for sometime until the economy catches up."
Investors were jolted back to reality yesterday by 9 percent decline in stock prices in China, driven by concerns that the Chinese government was moving to tamp down speculative activity and put some brakes on a roaring economy that has been helping support global economic growth.
In the US, investors got more bad economic news, when the Commerce Department reported that orders for durable goods, expensive equipment that is expected to last for years, fell sharply in January. Orders for durable goods are an indicator of future manufacturing activity.
Oil prices, meanwhile, have been rising recently, again topping $61 dollar a barrel, rebounding from recent lows of near $50 a barrel. In addition, former Federal Reserve chairman Alan Greenspan on Monday warned that the US economy might slip into recession by year's end, going against the consensus of most economists.
Harvey Hirschhorn, chief portfolio strategist at Bank of America in Boston, said he expects the market to swing up and down for a while, but ultimately move higher again. Despite this correction, the fundamentals of a growing economy, moderate inflation, and solid corporate profits remain in place, he said.
Meanwhile, many small investors, hardened by the crash of 2001, are ready to ride out this latest plunge.
Nan Sabel, a certified financial planner at Women's Financial Network in Bedford, said her phones remained quiet today. None of her more than 100 clients called looking to get out of the market, she said.
One of her clients, Jim McGinn, 51, of Bedford, said he plans to stand pat.
"The market goes up, and it goes down, so I don't get too shaken," he said. "I'm in it for the long haul, and the worst thing to do is panic."
Robert Gavin can be reached at rgavin@globe.com. Material from Globe wire services was used in this report. 