Disaster fears put investors on edge

Stocks plummet, then recover; Dow drops 312 pts, and it feels like relief

On the anniversary of the start of the 1929 crash, US stocks yesterday stepped back from the abyss, absorbing another day of steep losses but avoiding the catastrophe that investors and analysts feared when markets opened in New York.

The opening followed another wave of panic selling in overseas markets and a brutal sell-off in stock futures that projected losses of 1,000 points or more for the Dow Jones industrial average. The Dow plummeted more than 500 points in the first few minutes of stock trading, sparking concerns that so-called circuit breakers, which would suspend trading if the Dow fell more than 1,100 points before 2 p.m., would kick in.

Rep. Barney Frank says economy could turn around by summer. B9

Stocks, however, rebounded from the opening in one more day of seesaw trading. The Dow lost 312 points to end at 8,378.95, the lowest close since April 2003. The broader Standard and Poor's 500 index fell 31.34 to 876.77, while the technology-heavy Nasdaq Composite index fell 51.88 to 1,552.03.

That a 300-point plunge in the Dow would become a cause for relief illustrates how fragile markets and investor psyches have become, analysts said. Fear of potential disasters, from hedge fund collapses to a global recession to a freeze in credit, have investors on edge, ready to sell at any hint of trouble.

"After seeing the futures this morning and not knowing how bad it would get, there's a normal sense of relief that the worst did not materialize," said Bill Stone, chief investment strategist for PNC Wealth Management, a unit of PNC Financial Services Group Inc. of Pittsburgh. "It just underscores the intense volatility that we have been experiencing."

Yesterday's plunge, while not as bad as feared, ended another rough week for Wall Street. The Dow lost about 5 percent for the week and has plummeted 25 percent since the end of September alone. The Nasdaq took a worse beating, losing more than 9 percent for the week. The S&P 500 lost nearly 7 percent.

Many analysts expect the declines to continue over the next several weeks, and possibly for months. Fear is driving the market now, and investors are acting on bad news, which should be coming for a while. Corporations are now reporting earnings, and many have seen profits slip. In addition, they are warning of weaker earnings in coming months in the face of an economic downturn.

Economic data reported over the next several months are likely to be glum, too. The United States is probably already in recession, many economists say. Government data will probably show the economy contracting, unemployment rising, and employers cutting jobs.

Other countries are also heading for recession. In England yesterday, the government reported that its economy had shrunk in the third quarter, which ended Sept. 30. The news sparked a sell-off in London stock markets.

The US Commerce Department reports on third-quarter economic growth next week.

"There is a huge crisis of confidence," said Reena Aggarwal, a finance professor at Georgetown University in Washington. "The negative is far more powerful than the positive, and that market sentiment is not showing any cracks in it."

Analysts said market psychology will eventually change as investors begin to see signs the economy is nearing bottom and start looking for bargains. The stock market, which is forward-looking, tends to turn around about six months before the general economy does. Some analysts forecast the economy will begin to recover next summer.

Despite the gloomy outlook, economists said positive developments are underway that should boost the economy and stock markets over the next several months. Oil prices have plunged more than 50 percent since peaking above $145 in July. That is putting more money in consumers' pockets and reducing business costs. Oil closed below $65 a barrel in New York yesterday.

Interest rates are falling, too. The Federal Reserve is expected to cut its benchmark rate by as much as a half-point when policy makers meet next week. That would bring the rate back to a historic low of 1 percent. Low interest rates boost the economy by encouraging consumers and businesses to borrow and spend.

In an interview with Globe editors and reporters yesterday, Representative Barney Frank, the Newton Democrat who chairs the House Financial Services Committee, said he expects Congress to pass another economic stimulus package that would probably include money for road and bridge repairs, state Medicaid programs, unemployment and food stamp benefits, and tax relief for middle- and working-class taxpayers.

"Yes, we're going to have a recession," said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, "but all this stuff is going to help."

Ross Kerber of the Globe staff contributed to this report. Material from Globe wire services was used in this report. Robert Gavin can be reached at rgavin@globe.com.