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Stocks plunge on a wave of worry

Dow's closing lowest since 1997; Giant firms' woes shake investors

By Robert Weisman
Globe Staff / March 3, 2009
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Worried investors, responding to a drumbeat of distressing economic news, dumped shares yesterday and pushed the Dow Jones industrial average below the 7,000 mark for the first time since 1997.

With the benchmark stock index plunging 299.64 points - off 4.2 percent for the day, and 52.2 percent from its peak of 14,164 on Oct. 9, 2007 - market watchers said many investors were throwing in the towel and selling their holdings, or putting new money into cash.

That trend, known in financial circles as "capitulation," historically has been a sign that a bear market, a period marked by pessimism and falling stock prices, is nearing its bottom. But some stock analysts warned this market still may have further to fall.

"It's sort of the final discouragement trade, where people are just giving up," said James T. Swanson, chief investment strategist for Boston mutual funds company MFS Investment Management. "They don't see any hope, they don't see how it stabilizes, and they just want out. This is one of the great market collapses of all time."

Many analysts have forecast the current recession to be the longest and deepest since the Great Depression. It already has wiped out more than half of the peak value of US stock markets, devastating the wealth and retirement savings of tens of millions of Americans. Yesterday's sell-off alone shaved $96.6 billion in market value off the Dow.

Analysts said an accumulation of troubling events, not a single development, drove stocks down yesterday for the fourth straight trading day and 10th of the past 12 sessions. Troubled insurance giant American International Group posted a $61.7 billion loss, the largest in a single quarter in corporate history, as the US government said it will inject another $30 billion into the firm. British bank HSBC, meanwhile, said it needed to raise $17.7 billion to shore up its financial position. And fabled investor Warren Buffett told his shareowners the economy could be "in shambles" through 2009.

Other indexes, from the Standard & Poor's 500 to the technology-heavy Nasdaq to foreign stock exchanges, also dropped yesterday, while a widely watched volatility index - a measure of fear in the marketplace - spiked to its highest level in recent weeks.

"We're at heightened levels of fear," said John C. Forelli, portfolio manager for Independence Investments LLC, a Boston pension fund management firm. "And to me, the corollary of fear is irrationality. The frustrating thing is that there are bargains out there like I've never seen before, but no one's in the market taking advantage of them."

George Putnam III, president of Boston investment firm New Generation Advisors LLC, said investors are looking for a reason to buy beaten-down shares. But despite the Obama stimulus package and Fed interest rate cuts, he said, they have yet to be convinced that problems in the financial markets are over and the economy is poised to turn around.

"We may be getting near a bottom," Putnam said. "Markets always swing further than you expect, both up and down, and you're seeing the overswing on the downside now. It's possible when investors realize the world isn't going to end, it could snap back pretty sharply."

Forelli, however, said many cash-strapped investors don't have the money to put in stocks right now. He said the intertwined crises in housing, banking, credit, and employment aren't likely to end until housing prices tumble 10 to 15 percent more and find their floor.

Once that happens, Forelli said, buyers will resume snapping up homes, banks will stop reporting losses, and investors will regain confidence. "We think there's going to be pressure on the market for the next several months, and that's on the optimistic side," he said.

Technical market analyst Carl Swenlin, president of Decision Point, a Redlands, Calif., website specializing in market indicator charts, said he fears the market could retreat more and may not hit bottom until late 2010. "The fundamentals are horrible," Swenlin said, suggesting government borrowing and spending could aggravate the economy. "You've got earnings heading down and employment heading down. We're seeing a historic debt meltdown."

In the short term, analysts said, investors will be searching for signs that the financial shocks battering the market since last fall are over. Yesterday's news that AIG will get $30 billion in US loans, on top of $150 billion already invested, raised fresh questions about the health of the financial system. Just last week, the government raised its ownership stake in Citicorp to 36 percent to bolster the bank's capital base.

"People are worrying about what's next," said Putnam. "We've seen some of the biggest names in American finance fail, or almost fail. Investors need to see the end of that to restore their confidence."

Swanson, at MFS, said there are some encouraging signs, among them the low level of short-term borrowing rates in many countries around the world. Based on historical precedent, he said, the stock market can be expected to rebound before the broader economy begins to recover and companies resume hiring workers.

"The market somehow sees beyond the gloom and the valley," Swanson said. "It tends to move up six months before the labor numbers get to the bottom."

Robert Weisman can be reached at weisman@globe.com.

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