'Nothing worked this week'

Record moves in the Dow; World markets continue slide

US stocks, trapped in a riptide of negativity, plunged early yesterday before making up most of the loss and ending the stock market's worst week in history.

At the closing bell, the Dow Jones industrial average was down 128 points, or 1.5 percent, and it felt almost like good news. The market had roared back in the afternoon from frenzied selling during a week in which the Dow gave up a total of 1,874 points, or 18 percent, to close at 8,451.19.

No government gesture in recent days - no matter how many billions of dollars were involved - could calm investor anxiety over the health of banking institutions and the global economy.

"It seems that nothing worked this week," said Allen Sinai, chief global economist at Decision Economics Inc. in Boston. "What has emerged over the last week or so is that the US is in a full-fledged recession. It's no longer tentative."

Yesterday delivered a wild ride on the Dow, which tumbled nearly 700 points and swung up and down within a 1,000 point range for the first time ever in a single trading session.

Markets slumped from Tokyo to Frankfurt as they factored the reality of a slower economy into stock prices. Sluggish sales of goods and services will mean lower corporate earnings, analysts said, and ultimately will translate to fewer jobs and less money in consumers' pockets.

"The stock market is the effect, not the cause," said Kenneth Taubes, head of portfolio management at Pioneer Investments in Boston. "It's basically saying, if the credit markets aren't working, that means the economy's going to slow down, and earnings are going to fall off."

Investors pulled $9.4 billion out of equity mutual funds in the week ending Oct. 8, after cashing out a record $44.7 billion from funds that buy stocks in the month of September, according to AMG Data Services in Arcata, Calif. Individuals and institutions have been moving money to safer havens, particularly money markets that buy US government debt: Nearly $53 billion flowed into government money markets in the past week, AMG said.

"This reallocation is a flight to safety," AMG president Robert Adler said. "And it's the largest flight to safety in history."

The week started with the digestion of the $700 billion US bailout plan, moved to the Treasury's offer to buy ownership stakes in banks, and ended with an emergency weekend gathering of global financial leaders to address the financial crisis. President Bush, in a speech yesterday aimed at calming investors, acknowledged the anxiety in the marketplace and called the US government's plans "aggressive" and "big enough to work."

Yet there's been no immediate boost in confidence as a result of the announced programs. The US market's rollercoaster ride yesterday followed Tokyo's 9.6 percent market plunge overnight, its worst session since the crash of 1987. Markets in London, Paris, and Frankfurt had fallen 6 to 8 percent overnight.

Tokyo's Nikkei index dove 24 percent for the week, while the FTSE index in London dropped 21 percent. The Standard & Poor's 500 index fell 18 percent in the week; Nasdaq eked out a small gain yesterday but slumped 15 percent for the week.

Sinai said the stock market was adjusting "too far, too fast."

Many analysts now feel that the US government's original plan to buy battered mortgage-related assets from banks will take too long to soothe the markets. They now believe the latest proposal - to inject capital directly into banks in exchange for preferred stock - while an extraordinary measure, could boost confidence and spur lending faster. The British government unveiled a similar program last week.

"The only solution is for the government to step in here and provide some capital," Taubes said, so banks will work with one another and lend to businesses and individuals.

The recent whipsawing of the stock market could be, in part, because investors failed to recognize the deep problems simmering in the credit markets as far back as last summer, said Duncan W. Richardson, chief equity investment officer and executive vice president at Eaton Vance Management, a Boston mutual fund firm.

The implosion of the subprime mortgage market began over a year ago and spread across virtually every debt market. But investors didn't fully the see the ripple effect of the problem until several big banks failed or neared collapse last month.

"The stock market's in the back seat. The credit market's driving everything. We're just along for the ride right now," Richardson. The one positive note in that, he said, is that stocks are now so battered that they could ultimately help lead the market out of its funk as investors buy up bargains.

For the past two weeks, however, selling has prompted only more selling. When investors cash out of mutual funds and hedge funds, the managers of those funds have to sell stocks in order to come up with cash. Adler, the AMG president, said, "I am certain that mutual fund mangers see value in the market and are unable to take advantage of that value because they are, by necessity, executing sell orders."

Overall, investors are staying put. The $9.4 billion that left equity mutual funds over the last week is only about a half of a percent of the $1.6 trillion held in such funds. But investors' nerves - especially individuals who've just lost thousands of dollars in their retirement plans - are wearing thin with every new 500-point lurch of the stock market.

Said Richardson, "It has been an epic week."

Beth Healy can be reached at bhealy@globe.com.