Amid fears, stocks plunge again

It didn't take long for the mood to sour on Wall Street, with the benchmark Dow Jones industrial average quickly tumbling 528 points before regaining some ground. It ended the day down 419.63 points, a loss of nearly 3.7 percent. The Standard & Poor's 500 index fared worse, falling 53.24 points, or 4.4 percent, and drawing closer to the 20 percent drop from its spring peak that would signal a bear market.

"I'm hanging on by the skin of my teeth," said Jim Weiss, president of Weiss Capital Management, an investment advisory firm in Concord. "All this uncertainty is unnerving people, and causing investors and businesses to freeze. The dominant fear today is that the US will go back into recession."

Yesterday's drop erased $120 billion in market value from the Dow, 14.2 percent below its 2011 closing high on April 29.

The sell-off was driven by several economic worries that reinforced one another, including intensifying concern about Europe's debt crisis and the health of its banks - which have the potential to choke off credit on both sides of the Atlantic. There were also fresh economic warnings, notably one from Morgan Stanley, of slowing growth in the United States.

Perhaps most important was heightened anxiety by investors about what will spark an economic rebound at a time when consumers are fearful, governments are hamstrung, and corporations are sitting on pools of money - opting in many cases to buy back their own shares rather than hire workers and invest in new plants and equipment.

"Companies are reluctant to spend cash in periods of uncertainty," said David Sowerby, portfolio manager and chief market analyst for Loomis Sayles & Co., a Boston investment firm. "Is there a meaningful catalyst that will drive the market up? I don't see it."

Bill Cheney, chief economist at John Hancock Financial in Boston, described a somewhat more upbeat scenario. He said a series of modest boosts could lift the market later this year, such as lower oil prices, better retail sales, and a recovery in Japan.

Cheney projected a "mediocre, halfway decent growth trajectory" in the second half of 2011, with the US economy - which barely grew in the first half - expanding at an annual rate of 3 percent to 3.5 percent.

Whether that can happen will hinge in part on the health of US trading partners.

"A recession is not impossible, but it's not the most likely scenario," Cheney said. "Obviously, you could have more bad weather, tornadoes or a tsunami, or you could have the collapse of another oil-producing country. But in terms of what's reasonable to forecast, it seems like the third quarter should represent a little bit of a speeding up."

New data released yesterday confirmed that Massachusetts has continued to outperform the nation as a whole in job growth, though there are questions as to how long that can continue. The state added nearly 13,000 jobs last month and its unemployment rate held steady at 7.6 percent, comfortably below the 9.1 national jobless rate in July.

Though the state's diverse business base and educated workforce have buffered it from the worst of the economic furies, its different sectors are grappling with the weakening economy in different ways, said Paul H. Guzzi, president of the Greater Boston Chamber of Commerce. Retailers have been hurt by consumer skittishness and lenders by slack demand, he said, while the continued exports of microchips, medical devices, and data storage gear have aided the fortunes of high-tech and medical-device companies across the region.

"The economy has clearly slowed down, though relative to other states we have performed better," Guzzi said. "But there's a clear understanding that our economy is interconnected to the national and world economies."

Guzzi said many business people are frustrated by the "political ineptness" of lawmakers in both parties who have engaged in partisan sniping that has prevented them from tackling the nation's problems.

Investors' pessimism about an economic rebound was reinforced yesterday by a note from Morgan Stanley analysts, who cut their forecast of global growth in 2011 to 3.9 percent from their previous 4.2 percent projection. The analysts cited an inadequate response to the European debt crisis and warned that both Europe and the US are "dangerously close to recession." The mood was further dampened by continued unrest in the Middle East, with militants killing seven Israelis and President Obama calling for Syria's president, Bashar Assad, to leave office.

"That's giving an extra shove to the market," John Dorfman, chairman of Boston money management firm Thunderstorm Capital, said of the Middle East tensions. "A lot of investors are out of equities. The ones who are still in stocks are there for the long term."

Dorfman said his own response to the market slide has been to selectively buy attractive stocks that have been beaten down, as he has done in the past.

"I don't know what the market will do tomorrow or next week," he said. "But I do know that the market has returned north of 10 percent annually on average over the last 70 years through lots of wars and a dozen recessions. I think this market is relatively cheap."

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