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An alarming ride on Wall Street

Uncertainty, Greece’s plight factor in turbulent trading

By Steven Syre and Beth Healy
Globe Staff / May 7, 2010

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It took only five minutes to scare investors again.

The US stock market, already spooked by the European debt crisis, was whipsawed yesterday by wildly volatile trading that drove the Dow Jones industrial average down by nearly 1,000 points before it recovered later in the day.

The Dow, in its worst single trading day of the past year, closed down 347.8 points, to 10,520.32, a loss of 3.2 percent. The extreme gyrations of the afternoon recalled the panic selling from the darkest days of 2008 and the stock market crash of 1987.

‘‘It was pretty breathtaking,’’ said Andrew Lo, a professor of finance at MIT’s Sloan School of Management and an investment manager in Cambridge. ‘‘People are uncertain about many things, and what we saw today was that uncertainty playing out.’’

The spectacular plunge — which may have been fueled by unusual trading in a few stocks — comes at a time when the economy has been on the mend, with hiring and spending up and the housing market rebounding. But analysts and investors said a day like yesterday, combined with mounting concerns about Greece’s debt crisis, raises new doubts about a global economic recovery.

And it is almost certain to jolt individual investors, who had recently been feeling more comfortable putting their money in stocks after the long recession that followed the 2008 financial collapse.

Nick Scully, a technology specialist from London who was visiting Boston, said the surprising stock drop increases his worries about the stability of the European and US economies.

‘‘The shake-out has a long way to go,’’ he said. ‘‘It’s especially depressing for me because I’ve already bought my holiday trip to Greece.’’

Scott Petruska, a banker from Holliston doing business in downtown Boston yesterday, said: ‘‘I think there’s a certain amount of denial [about the economy] and that people think things are going to get better again. I’m in the camp where we have to hunker down and wait for better times.’’

At one point, the Dow had plunged by 998 points, or about 9 percent, temporarily wiping out about $1.25 trillion in value. More than half of that swoon was recorded in an astounding five-minute period — from 2:41 to 2:46. Five minutes later, most of the loss was recouped.

Trading activity in a few particular stocks may explain much of the 90-minute decline and recovery. The New York Stock Exchange intentionally slowed the buying and selling of stock in Procter & Gamble Co. and 3M Co. — both major components of the Dow average — along with shares of Accenture Ltd., due to what it said was exceptionally volatile trading. At one point in the day, shares of Accenture, a consulting firm, fell from $40 to a single penny and then rose back to $40 again.

Shares of those companies continued to trade in other markets, where there may have been fewer buyers to match up with sellers. As a result, all three stocks plunged, dragging the broader market down with them, but recovered quickly when they resumed trading normally on the New York Stock Exchange.

The Nasdaq market, which may have received some of the sell orders during that brief period, said it planned to cancel related transactions recorded between 2:40 and 3 p.m.

The Securities and Exchange Commission and the Commodity Futures Trading Commission issued a joint statement late yesterday saying they were ‘‘working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors.’’

Even before yesterday’s technical issues at the New York Stock Exchange, stocks were already on edge and had been heading lower. In addition to the debt crisis in Greece, which threatens to spread to other European nations, the giant oil spill in Louisiana and the unfolding terrorist story in New York have also weighed on investors.

‘‘There’s just a lot of uncertainty over the sovereign debt crisis,’’ said John Carey, a portfolio manager at Pioneer Investments in Boston.

‘‘We got through the so-called financial crisis only to find we’re in it again and this time it’s not subprime residential loans.’’

Some money managers believe stock prices are due for a retreat after climbing about 60 percent since hitting bottom 14 months ago. Most market corrections are triggered by some specific event, and debt problems in Europe could be the cause this time, they said.

‘‘After the run we’ve experienced, a pullback would seem natural,’’ said Tom Manning, chief investment officer at Silver Bridge Advisors in Boston.

The US economy has expanded at a solid pace for three consecutive quarters and started again to create jobs. Employers added more than 160,000 jobs in March, and many analysts forecast that employment increased by at least that much in April. The Labor Department reports April employment data today.

‘‘We have sustainable economic growth, sustainable improvement in the labor market,’’ said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, N.C. ‘‘The pace of growth may be less than we want to see, but I don’t see us doing a double-dip recession.’’

If the problems in Europe lead to an extended market downturn, however, they could stunt some of that growth, warned Mark Zandi, chief economist at Moody’s Analytics, a unit of Moody’s Corp. in New York.

Still, Zandi put the chances of the US economy slipping back into recession at less than 1 in 5.

‘‘Assuming that this comes to a pretty quick end,’’ Zandi said, ‘‘we’ll make our way through.’’

But Brian Jacobsen, chief portfolio strategist at San Francisco-based Wells Fargo Funds Management Group, said yesterday’s down-and-up ride could cause ordinary investors to pause before they move into stocks.

‘‘I think it makes them all of a sudden re-question whether they should be getting back in,’’ he said. ‘‘When you have a market like this and you see riots in Greece, that certainly doesn’t help matters much.’’

Robert Gavin and Megan Woolhouse of the Globe staff contributed to this report. Steven Syre can be reached at syre@globe.com; Beth Healy can be reached at bhealy@globe.com.