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Worldwide anxieties send stocks sinking

Dow posts its worst 2-day period since ’08

Traders worked on the New York Stock Exchange floor yesterday. The Dow had its worst two-day decline since 2008. Traders worked on the New York Stock Exchange floor yesterday. The Dow had its worst two-day decline since 2008. (Brendan Mcdermid/Reuters)
By Steven Syre
Globe Staff / September 23, 2011

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Stock prices plunged in the United States and around the world yesterday as investors became increasingly gloomy over prospects for the global economy and the possibility of another recession.

The stock market rout began Wednesday afternoon with words of warning on the economy from the Federal Reserve, which unveiled its plans to stimulate growth. But the nose dive extended overseas and sent US markets sharply lower for a second straight day. The Dow Jones industrial average fell 527 points before recovering a bit, closing down 391.01 points, or 3.5 percent, to 10,733.83.

Including a plunge of 283.82 points on Wednesday, the Dow average suffered its worst two-day decline since December 2008, when panicky financial markets went through an extended free fall.

The Fed comments that initially sent stock prices plummeting were far from dramatic, warning that the economy faced “significant downside risks’’ and citing “global financial strains,’’ in particular. None of that came as news. But delivered by Fed policy makers, the message caught the attention of the world.

“I think the Fed saying it, even though everyone knows it, is meaningful,’’ said Erik Weisman, a portfolio manager at MFS Investment Management in Boston. “The Fed doesn’t say things like that lightly. They know if they say something negative the markets could react. I think it tells you how concerned they are.’’

Major stock indexes around the world plunged by 4 percent or more, especially in big European markets, where political and financial leaders have been unable to resolve debt problems in Greece that could extend to other countries.

The leading stock market in France - where banks hold billions of dollars of Greek debt - slumped 5.25 percent. Markets in Germany fell about 5 percent, while stocks in Great Britain sank 4.7 percent.

The cautious words from the Fed, evidence of a slowing economy in China, and ongoing anxiety over Europe’s ability to manage its sovereign-debt crisis all helped to drive investors out of riskier holdings and into very-low-risk alternatives.

Traders seeking safer havens drove interest rates on US Treasury securities - which move in the opposite direction of prices - to extraordinary lows. Investors buying 10-year Treasury notes yesterday accepted a paltry yield of 1.72 percent, a record low. The yield on 30-year Treasury bonds fell to 2.8 percent, the lowest since the darkest days of the financial crisis at the end of 2008.

Stock market declines were broad-based yesterday, but shares of companies that depend on a growing economy were among the hardest hit over the past two days. Industrial and commodity-based companies were the worst performers yesterday among the stocks that make up the Dow. FedEx Corp., a business that rises and falls with the economy, cut profit forecasts, and its shares fell more than 8 percent.

For several years, companies around the world have been able to post extremely strong profits despite tepid economic growth - a key factor in the stock market’s climb since 2009. But some investors worry the economy will finally catch up to businesses and slow profits.

“Remember the picture of Atlas, the guy who was holding up the world by himself? He just got a gigantic charley horse,’’ said James Weiss of Weiss Capital Management in Concord.

Many other investment managers believe markets are headed for an extended bumpy ride that won’t end until economies are able to generate more jobs.

“Without job creation, you’re going to have a tough time getting consistency to the market,’’ said John Hailer, chief executive of Natixis Global Asset Management. “There’s no driving force. People are trading on bad news no matter where in the world it comes from. They’re just saying they’re out and maybe they’ll buy tomorrow.’’

As the Fed made its cautious comments on the economy Wednesday, it unveiled a new effort to help stimulate growth. That plan, to sell $400 billion of shorter-term securities it already owns and use the money to buy longer-term debt, is designed to lower interest rates on loans.

But many economists believe that plan is unlikely to spur economic growth because rates are already so low. The biggest thing holding back lenders and borrowers, economists say, is not the cost of borrowing money, but uncertainty about the economic future.

Despite the Fed’s unusually pessimistic and public concerns about the economy, two US economic reports issued yesterday, both based on actual business and financial activity, were not especially dire. Yet they seemed to get lost in the stampede of stock sellers.

The Conference Board’s index of leading indicators increased by more than its forecast in August. The index, which measures the outlook for growth over the next three to six months, increased by 0.3 percent, following a gain of 0.6 percent in July.

Meanwhile, the weekly report on new jobless claims in the United States was slightly higher than forecast, but close to the expected target.

“In terms of actual data, [the reports] didn’t signal chaos throughout the world,’’ said John Cogswell, a portfolio manager at Baystate Wealth Management.

Steven Syre can be reached at syre@globe.com.


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