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Stocks plunge on fear

Economic data show worsening recession; S&P 500 at lowest level in 11 years

Rocky wire reports

Published November 21, 2008 at 12:05 a.m.

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Traders work in the crude oil options pit at the New York Mercantile Exchange in New York on Thursday. Crude oil tumbled to its lowest price since May 2005 as a sour economy cut demand.

Photo by Ramin Talaie / Bloomberg News

Traders work in the crude oil options pit at the New York Mercantile Exchange in New York on Thursday. Crude oil tumbled to its lowest price since May 2005 as a sour economy cut demand.

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U.S. stocks plunged for a second straight day Thursday, with the Standard & Poor's 500 Index falling to its lowest level in 11 years after economic reports depicted a deepening recession.

The S&P 500 extended its 2008 tumble to 49 percent, poised for the worst annual decline in its 80-year history.

"We're just trying to stay away from the window," said James Paulsen, who helps oversee about $220 billion as chief investment strategist at Wells Capital Management Inc. in Minneapolis. "This isn't about fundamentals, it's not about bad balance sheets, it's about fear and confidence."

As Congress prepared to leave town - perhaps for the year - there was no resolution on helping the auto industry, a disaster in the making that could lead to hundreds of thousands if not millions of additional lost jobs. Democratic leaders said they could return to Washington in mid-December to vote on rescue loans if the carmakers first present a plan on transforming and modernizing their operations.

Discouraged by the stalemate over auto aid, investors sent the Dow Jones industrials down to another big loss, 445 points.

Adding to the dismal day in the markets:

* The S&P 500 slid 6.7 percent to 752.44, under the low of 776.76 reached during the bear market in 2002.

* The Nasdaq decreased 5.1 percent to 1,316.12.

* Twelve stocks retreated for each that rose on the New York Stock Exchange.

* More than 2.2 billion shares changed hands on the floor of the NYSE, its busiest trading session since Oct. 10.

The S&P 500 extended its plunge from an October 2007 record to almost 52 percent in the worst bear market since the Great Depression. Concern that the recession is worsening was spurred after jobless claims approached the highest level since 1982, the index of leading economic indicators fell for a third time in four months and the Federal Reserve said manufacturing in the Philadelphia area shrank at the fastest pace in 18 years.

Seventeen companies in the S&P 500 lost more than one-fifth of their market value Thursday, as all 10 of the index's main industry groups slid at least 3.5 percent. Chesapeake Energy Corp. and National-Oilwell Varco Inc. sank more than 21 percent after crude fell to a three-year low on concern the slumping economy will crush demand.

JPMorgan Chase & Co. lost 18 percent and Citigroup Inc. dropped 26 percent as concern the recession will trigger more bankruptcies pushed the cost of insurance against corporate defaults to an all-time high.

Treasury yields declined to record lows, with two-year note rates dropping below 1 percent for the first time, as investors sought the safety of government debt.

"It's an ugly mess out there," said Randy Bateman, who oversees $15 billion as chief investment officer of the asset management unit of Huntington Bancshares Inc. in Columbus, Ohio. "The economy is confirming it is very, very weak."

Analyst Paul Miller at FBR Capital Markets in Arlington, Va., said as much as $1 trillion in capital may be needed to shore up the financial system. "It's probably going to take another year for things to calm down, for people to feel a little more comfortable with the economy," said Russell Rolnick, senior vice president for Lenox Advisors Inc., which oversees more than $1 billion in New York.

"People these days seem to be more interested in capital preservation than appreciation."

The broader economic questions of what further actions Washington must take to avoid more home foreclosures and rectify staggered financial markets will probably have to wait until January, when the new Democratic-dominated Congress will convene and Barack Obama will be in the White House. An economy-stimulating package that could run into the hundreds of billions of dollars is likely to be on the agenda when the next Congress opens.

Treasury Secretary Henry Paulson said Thursday that the financial crisis now plaguing the world economy is something that happens "once or twice" in 100 years.

Paulson's remarks follow pledges by world leaders attending last week's emergency economic summit to begin an overhaul of the world's financial regulatory system.

With the next summit slated for the spring, the work on fleshing out details for the Herculean task will fall to the incoming administration of President-elect Obama and his new Treasury secretary.

Paulson, whose boss President George W. Bush leaves office on Jan. 20, acknowledged that the financial crisis was caused by many factors including "government inaction and mistaken actions, outdated U.S. and global financial regulatory systems, and by the excessive risk-taking of financial institutions." Still, he cautioned against the U.S. and other countries developing a too-onerous regulatory response.

"If we do not correctly diagnose the causes, and instead act in haste to implement more rather than better regulations, we can do long-term harm," Paulson said in a speech in Simi Valley, Calif.

Earlier this week, lawmakers blasted Paulson for his handling of a $700 billion financial bailout package to help ease the crisis and restore stability and confidence to unhinged markets.

Paulson on Thursday again defended his management, including his decision last week to officially abandon the original rescue strategy: buying rotten mortgages and other bad debts from banks to free up their balance sheets and get them to lend more freely.

"By proactively addressing the problems we saw coming and being pragmatic enough to change strategy in the face of changed facts and despite the inevitable criticism - we prevented a far worse financial crisis," Paulson insisted.

Focusing the bailout program on infusing billions into banks - and possibly other types of companies - to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than the original centerpiece of the plan, he said.

"There was no playbook for responding to a once or twice in a 100-year event," Paulson argued, saying he needed to shift strategy to respond to worsening financial and economic conditions.

THEY SAID IT:

"If you're not able to sleep at night, then you need to make some change to your portfolio. If that means you have to sell positions and go to cash, that's what you have to do. In that case, you should consider more stable investments, including money markets, government agency bonds or tax-free municipal bonds."

Gregory Anderson, GRAnderson Wealth Management

"It may get worse before it gets better, but the much needed healing process in financials has begun . . . we believe that the system will not fail and to hang in there with stocks."

John Goltermann, Obermeyer Asset Management

"I have been contacting clients for some time, and those without the risk tolerance to accept these declines had been converted to a more conservative position already."

Dennis Clark, Capital Asset Management

"The best time to invest is when others are too afraid or financially unable to. It may not seem like it at the time, but you make your money in bear markets."

Joseph Janiczek, Janiczek & Co.

"If a client has remained fully invested, I would recommend maintaining their positions, as long as they are well-diversified. If a client has been on the sidelines, stocks and bonds are looking very attractive."

Michael Serota, Advanced Wealth Management

"Stocks are trading on emotion, not fundamentals. Have a long-term plan and stick to it."

Ned Sundermann, Sundermann Capital Management

Comments

  • November 21, 2008

    10:39 a.m.

    Suggest removal

    StocksNCigars writes:

    Here is the situation,the market movements are beyond any of our control. If you have a solid plan, stick to it, if not; get a plan. Longer term investors are going to look back at this market as one of the single best buying opportunities in their lifetime. Stay diversified. Own diversified portfolios which include bonds, stocks, etc.