The Dow and the S&P fell down more than 4 percent on Thursday and the Nasdaq lost 5 percent on fear the United States is staring at another recession and that Europe’s sovereign debt crisis is swallowing two of its largest economies.
A week’s worth of declines in the stock market erupted into an outright plunge as a stream of bad news kept coming: The American economy is barely growing; the federal government is preparing to slash spending; and a growing crisis in Europe increasingly threatens to send shock waves through the system.
Analysts predicted further losses even though stocks have fallen on nine of the last 10 days. Two-year Treasury yields fell to a record low as investors sought safety in short-term government bonds.
Experts say investors have factored in a terrifying risk — that the economy might begin to contract.
“With the policymakers out of bullets and the economy slowing, the market is re-pricing the possibility of a genuine double-dip recession,” said John Richards, head of strategy at Royal Bank of Scotland in the Americas.
“It isn’t like that’s everybody’s mainline scenario, and it doesn’t have to be for markets to go down,” he added. “All you’ve done is increased the risk of the double dip from one-in-20 to one-in-five, or maybe one-in-three. That’s enough to cause a major sell-off in a market like this.”
“People are throwing in the towel because they can’t find relief on any front,” said Milton Ezrati, market strategist at Lord Abbett Co. in Jersey City, New Jersey, which manages $110 billion in assets.
The bad news began Friday, when the government announced the economy grew at an annual rate of just 0.85 percent in the first half of the year. Seen in relation to population growth, gross domestic product actually shrank during the first three months of the year.
The Dow Jones industrial average was down 512.46 points, or 4.31 percent, at 11,383.98. The Standard & Poor’s 500 Index fell 60.21 points, or 4.78 percent, at 1,200.13. The Nasdaq Composite Index lost 136.68 points, or 5.08 percent, at 2,556.39.
Some 13.92 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, the highest since June 25, 2010, and well above the daily average of around 7.48 billion.
Losses occurred in all sectors. Among stocks hitting new 52-week lows were Bank of America, down 7.4 percent at $8.83, Citigroup, down 6.6 percent at $34.81, and Hewlett-Packard, down 5.1 percent at $32.54.
A plan for fiscal tightening could hardly be coming at a worse time, as key economic indicators point to a weakening recovery. The Institute for Supply Management announced Monday that the manufacturing sector had barely grown at all in July. Consumer spending fell in June, the government announced Tuesday, for the first decline in nearly two years.
The gloomy situation at home got an unwelcome jolt from abroad on Thursday, as investors began to fear for the economic health of Italy. After an announcement by the European Central Bank made it seem that the monetary authority might not intervene to assist the economies of Italy and Spain, investors entered panic mode, causing the yields on Italian debt to shoot higher.
It was only the latest sign of the worsening crisis among countries that share the euro currency. With Greece mired in a fiscal disaster, experts fear a widespread loss of confidence among investors, a scenario that could raise the cost of borrowing for a group of weak nations — and even push governments into default.
“The crisis has entered a self-fulfilling phase,” said Biagio Lapolla, a rates strategist at Royal Bank of Scotland in London. “We’re not talking anymore about a specific country’s problem. We’re talking about a euro-wide systemic crisis.”
“The debt troubles in Europe, especially with the yields on Italian and Spanish government bonds soaring, are making investors gather as much liquidity as possible,” said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.
All eyes are on Friday’s unemployment report. The jobless rate, at 9.2 percent in June, has risen for three straight months, intensifying worries that the economy could slow to a stall.
“Fears the U.S. economy is headed for another recession have started to grow again,” said Paul Dales, senior U.S. economist at Capital Economics. “It really started around the end of last week, when we had a really weak GDP report in the United States, and then it’s just grown from that.” [via Huffpost and Reuters]