Stocks dive on worries of recession
The Associated Press
Originally published 01:19 p.m., January 22, 2008
Updated 01:19 p.m., January 22, 2008
NEW YORK — Wall Street struggled to steady itself today, climbing back from an early plunge after the Federal Reserve cut interest rates to restore stability to a faltering U.S. economy. The Dow Jones industrials, down 465 points at the start of the session, recovered to a loss of about 95 points.
The U.S. markets had joined a global selloff amid growing fears that a U.S. recession could send economies around the world into a downturn. Though stocks recovered much of the ground they lost as investors digested the Fed’s move to cut the key interest rate by 0.75 percentage point and as bargain-hunters entered the market, trading remained volatile.
“Sometimes market bottoms are not made by specific events, but by exhaustion,” said Peter Boockvar, equity strategist at Miller Tabak. He said that for the market to truly gain a foothold, investors need to see strong earnings reports and economic data in the coming weeks.
“If that doesn’t happen, then all this is a short-term bottom before a resumption of selling,” Boockvar said.
The Dow was off about 95 points at the 12,003 level in late morning.
The blue-chip index fluctuated sharply, and trading was expected to remain volatile.
“Nervous investors are at their wits’ end, and that’s causing kneejerk reactions,” said Jack A. Ablin, chief investment officer at Harris Private Bank. “I think that without the cut we’d certainly be down more, but what we’re talking about here is really just psychology.”
The broader Standard & Poor’s 500 index was off 18.64, or 1.41 percent, at 1,306.55, while the Nasdaq composite index fell 47.87, or 2.05 percent, to 2,292.15.
It was the first time the Fed altered the target federal funds rate between scheduled meetings since the markets reopened after the Sept. 11, 2001 terrorist attacks. The cut was the biggest one-day rate move by the Fed since it lowered rates by a full percentage point in December 1991, when the country was trying to emerge from recession.
The Fed said in a statement that it took the steps to address a “weakening of the economic outlook” and “increasing downside risks to growth.” The bank also said it will act in a timely way to address future risks.
“They seemed to react to the markets rather than anticipate the markets, but they did the right thing,” said economist Edward Yardeni, who runs his own research firm.
It’s been a dark year so far for stocks. The S&P 500 index, the broadest measure of the stock market, has suffered its worst annual start ever, giving up about 13 percent in just three weeks. The Dow is down about 12 percent since the beginning of the year, and the Nasdaq is down approximately 15 percent.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.59 percent from 3.63 percent late Friday. Crude oil prices fell $1.27 to $89.30 a barrel on the New York Mercantile Exchange on concerns that a weak economy will dampen energy demand.
The dollar fell against most other major currencies except the yen, while gold prices rose.
The prospect of a U.S. recession dragging down other economies around the world has infected the global markets, which plunged on Monday when Wall Street was closed for Martin Luther King Jr. Day.
In Asia on today, Japan’s Nikkei stock average closed down 5.65 percent — its biggest percentage drop in nearly a decade. Hong Kong’s Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, attacks.
In afternoon trading, European stocks pared losses after the Fed’s rate reduction. Britain’s FTSE 100 rose 0.94 percent, Germany’s DAX index lost 0.80 percent and France’s CAC-40 rose 1.54 percent.
Last week, each of the major U.S. indexes cascaded lower as investors grew skeptical that plans by U.S. lawmakers and President Bush to stimulate the U.S. economy will keep the U.S. from tipping into recession. The plan Bush announced Friday, which still needs Congressional approval, outlines $145 billion in tax relief to help spur consumer spending.
One reason Wall Street is so terrified about the economy is because its own financial muscle has atrophied. The banking industry in the second half of 2007 watched its portfolios shrink by some $135 billion because of losing bets on mortgages. Just Tuesday, Bank of America Corp. posted a 95 percent drop in fourth-quarter profit, and Wachovia Corp. reported that its fourth-quarter earnings dove 98 percent.
Last year, the prime worry was the tight credit markets; now, the bigger concern is the average American struggling to make his debt payments. Consumer spending drives about two-thirds of the U.S. economy.