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Stocks plunge on fears of crisis

Major indexes down 3% as investors worry European debt woes will derail US recovery

As stocks fell, some analysts questioned whether the market’s rebound from 2009 might not have been entirely justified. As stocks fell, some analysts questioned whether the market’s rebound from 2009 might not have been entirely justified. (Chris Hondros/Getty Images)
By Tim Paradis and Stevenson Jacobs
Associated Press / May 21, 2010

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NEW YORK — Stocks plunged again yesterday as more investors woke up to the possibility that economic problems such as Europe’s debt crisis might spread around the world and stop the growing recovery in the United States.

The Dow Jones industrial average fell 376 points, its biggest one-day point drop since February 2009, and all the major indexes were down more than 3 percent. Meanwhile, interest rates fell sharply in the Treasury market as investors once again sought the safety of US government debt.

With yesterday’s drop, the Standard & Poor’s 500 index, considered the best indicator of the stock market’s performance, is down almost 12 percent from its highest close in 2010, 1,217.28 on April 23. That means the market is officially in what is called a correction — a drop of 10 percent or more from a recent high. This is the first correction since stocks hit 12-year lows in March last year. The fact it has occurred in just 19 trading days shows how anxious traders are right now.

Analysts said there was no big event to set off yesterday’s selling. More investors seemed to be grasping the possibility that the US recovery could be in jeopardy. And many were wondering whether the stock market’s big rebound since March 2009 might not have been entirely justified.

“The economic recovery story has started to look like a mirage, and the new reality is a return to credit crunch conditions’’ like those seen during the financial crisis, said Tom Samuels, manager of the Palantir Fund in Houston. “If that’s correct, stock prices are well ahead of economic reality.’’

Investors are concerned that the debt problems in European nations like Greece and Portugal will spill over to other countries, cause a cascade of massive losses for big banks, and, in turn, halt the economic recovery in countries beyond Europe, including the United States. They are also worried that China might take steps that will limit its economic growth, which would also affect the US recovery. Analysts said the market is vulnerable to rumors about any of the major economies now.

Investors appear increasingly convinced that European countries will need to adopt stringent spending cuts to pay down their heavy debt loads, independent market analyst Edward Yardeni said. Such cuts would likely lead to long economic slumps for those countries, a prospect that investors might now be accepting as reality as they sell stocks and the euro, the currency shared by 16 European nations, Yardeni said.

The euro, which has become a key indicator of confidence in Europe’s economy, managed to rise to $1.2496 in late afternoon trading, a day after hitting a four-year low of $1.2146. But its advance didn’t help stocks.

“The drop in the euro is the initial phase of a long-term, multi-year economic decline in Europe,’’ Yardeni said. “It shows a declining confidence in the workability of the EU [European Union] monetary union, and that’s why their stock markets are down.’’

“It’s starting to look like one of these tragic stories where one person falls through the ice, then everyone else rushes in to help and ends up drowning,’’ he added.

The market’s slide over the past four weeks on worries about the global economy has been a painful reminder of the turbulent days during the 2008 financial crisis. On April 26, the Dow closed at its highest point since the market tumbled to 6,547.05 on March 9, 2009. In recent weeks, it has fallen nearly 1,000 points. It has declined by at least 100 points in nine of the 18 trading days since its peak.