The Dow Jones industrial average fell 419.63 points on the day, or 3.7 percent, to 10,990.58. The Standard & Poor’s 500-stock index dropped 4.5 percent to 1,140.65. The technology-laden Nasdaq composite fell the most, ending down 5.2 percent at 2,380.43.
Fresh evidence emerged Thursday that U.S. home sales and manufacturing are weakening. Signs also surfaced that European banks are increasingly burdened by the region’s debt crisis and sputtering economy.
Gold rose along with Treasuries as investors sought safety. Oil prices fell on expectations that demand would be tempered in a slowdown.
Brent fell as low as $105.80 a barrel, down more than $1 from the previous session, and has lost more than 9 per cent this month, the worst slide since a near 15 per cent drop in May 2010.
Nervous investors fled to the safety of core government bonds, Swiss francs and gold, which hit a record high, with many seeking to unwind holdings of riskier assets such as stocks, commodities and higher-yielding currencies before the weekend.
European shares extended steep losses from Thursday, when they suffered their biggest daily slide in 2-1/2 years, with key indexes in Britain, France and Germany all deep in the red.
The FTSEurofirst index was down 1.25 per cent, having already lost 15 per cent this month to put it on track for its worst monthly decline since at least 1997.
The MSCI world equity index was down 1 per cent. It too has lost nearly 15 per cent since the start of month, and saw nearly $1.4 trillion wiped off valuations on Thursday and early on Friday — equivalent to the combined economies of Greece, Ireland and Portugal.
Economists say the economic weakness and the stock markets’ wild swings have begun to feed on themselves. Persistent drops in stock prices erode consumer and business confidence. Individuals and companies typically then spend and invest less. And when they do, stock prices tend to fall further.
“A negative feedback loop … now appears to be in the making” in both the United States and Europe, Joachim Fels and Manoj Pradhan, economists at Morgan Stanley, said in a report Thursday. Both economies are “dangerously close to a recession. … It won’t take much in the form of additional shocks to tip the balance.”
“We took a little break for a couple days, and it is reinstating itself and I just think that this should probably be expected,” said Nick Kalivas, an analyst at MF Global in New York.
“The heavy selling is on the back of fears over the state of global economic growth and the ability of European banks to withstand another freezing-over of credit markets,” said Ben Potter, strategist at IG Markets.
An unexpected fall in existing U.S. home sales in July and a greater than expected rise in new claims for jobless benefits in the latest week also added to those concerns.
U.S. home sales fell in July for the third time in four months, the National Association of Realtors said. Sales dropped 3.5 percent to a seasonally adjusted annual rate of 4.67 million homes. That’s far below the 6 million homes that economists say must be sold to sustain a healthy housing market.
A survey by the Federal Reserve Bank of Philadelphia shows that manufacturing in the mid-Atlantic region contracted in August by the most in more than two years. The steep drop, on top of a smaller decline in a New York Fed survey this week, means U.S. manufacturing probably contracted in August, economists said.
Consumer prices rose 0.5 percent in July, mostly due to more expensive gas and food. The “core” price index, which excludes volatile food and energy prices, rose 0.2 percent. The higher prices add to the burdens for Americans already squeezed by stagnant pay, though economists don’t expect prices to rise much further. And gasoline has fallen this month.
Renewed fears that the euro zone debt crisis could engulf the region’s financial system put pressure on short-term funding markets, forcing some European banks to pay higher rates for dollar loans and reviving memories of the dark days of late 2009 after the collapse of Lehman Brothers.
“There has been a panic about European banks. European governments are guaranteeing European banks, but if the governments are not stable themselves, that means the banks aren’t stable,” said Lothario Mendel, chief investment officer at Octopus Investments, which manages $4 billion.
In Asia, Japan’s exports fell for a fifth straight month. The world’s No. 3 economy has fallen into a recession since its earthquake and tsunami in March. Its weakness is contributing to the global slowdown. [Header photo via Stéfan/Flickr; via Huffpost, The New York Times, Reuters and The Economic Times]