NEW YORK – U.S. stocks fell again today, led by financial and energy shares, as recession fears continued to outweigh government attempts to shore up the markets.
Twenty stocks fell today for each one that rose on the New York Stock Exchange.
Dow Jones Industrial Average closed below 9,000 for the first time in five years, tumbling 678.91 points, or 7.3 percent, to end the day at 8,579.19. The Standard & Poor’s 500 Index fell 74.93 points, or 7.6 percent, to 910.01 points in its seventh consecutive day of declines. The Nasdaq Composite Index fell 95.21 points, or 5.5 percent, to close at 1,645.12.
“The sickening slide in the market is unbelievable,” Jerome Dodson, a fund manager who oversees $1.7 billion at San Francisco-based Parnassus Investments, told Bloomberg News.
Causes may have included news that the U.S. economy is expected to lose ground in the second half of the year – after growing at an annual rate of 3.3 percent in the second quarter and 0.9 percent in the first (READ MORE) – based on the median forecast of 52 economist surveyed by Bloomberg News. Their predictions called for the economy to shrink at an annual pace of 0.2 percent in the third quarter, which ended Sept. 30, and 0.8 percent in the year’s final three months.
That report followed forecasts by economists at The Conference Board and International Monetary Fund calling for the U.S. and global economic contraction to continue to worsen into next year. “We are on the cusp of a global recession,” Dominique Strauss-Kahn, the IMF’s managing director, told a news conference this morning in Washington, D.C.
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Government reports today also showed that U.S. wholesale inventories and the nation’s unemployment rolls both continued to rise:
• Inventories at U.S. wholesalers swelled another 0.8 percent in August – twice the 0.4-percent stockpile growth anticipated by analysts in a Bloomberg survey – after growing a revised 1.5 percent the month before, the U.S. Commerce Department’s Bureau of the Census said in its Monthly Wholesale Trade report. The bureau blamed a decline in sales, which were down 1 percent from the month before.
• Likewise, although new claims for unemployment benefits declined slightly last week, the total number of people receiving jobless benefits continued to rise, according to the latest data from the U.S. Department of Labor’s Employment and Training Administration. (READ MORE)
Yet markets had opened higher this morning (READ MORE) amid optimism about lower interest rates and Treasury Secretary Henry M. Paulson Jr.’s announcement that U.S. regulators will revise their $700 billion rescue plan to include the purchase of equity in ailing financial institutions – as in the U.K. bank-bailout scheme (READ MORE) – rather than simply buying up bad debt.
In the end, the market’s plunge was blamed by some on investor fears that may have reached irrational levels.
“When we are panicked, we misread signals, we misread mild threats as catastrophic threats and we become unduly conservative,” Hersh Shefrin, a professor of behavioral finance at Santa Clara University in California and author of a 2000 paper entitled “Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing,” told Bloomberg News.
“People are driven by images of the best and worst that can happen,” added George Loewenstein, a professor of psychology and economics at Carnegie Mellon University in Pittsburgh. “The image of the worst is much more vivid in their minds right now.”
Additional information about the U.S. Emergency Economic Stabilization Act of 2008, U.S. monetary policy and the administration’s latest efforts to stabilize the financial markets is available from the Federal Reserve System at www.FederalReserve.gov and the U.S. Treasury Department at www.treas.gov.
