Recession Fear Shakes Stocks as Dow Suffers Worst Drop Since 1987

October 16, 2008 at 12:54 am Leave a comment

NYSE-worker.jpgFearing that the fallout from the credit crunch will cause a deep
recession, stocks suffered their worst drop since the 1987 crash
Wednesday and gave back nearly all of Monday’s record gains.

Despite unprecedented steps by the government to
thaw credit markets, dismal economic news Wednesday from retailers and
the Federal Reserve suggests that business conditions are likely to
deteriorate more severely before things turn around.

“Investors are starting to worry that this will
be a lot worse than your basic Recession 101,” says Sam Stovall, chief
strategist at Standard & Poor’s.

That worry sparked a fresh bout of fear and
heavy selling on Wall Street. The Dow Jones industrials plunged 733
points, or 7.9%, to 8578, its second-biggest point drop ever and its
worst percentage slide since it fell 22.6% in a single day in 1987.

Perhaps most discouraging to investors is that
the Dow has given back all but 127 points of its record 936-point gain
Monday. Traders say the Dow is on a collision course to test the panic
lows hit last Friday, a week in which it fell a record 18.2%. The Dow
is 39.4% off its high.

While an official recession has not been
declared because the economy has not yet had two consecutive quarters
of economic contraction, Wall Street is convinced a recession has
already started. Many analysts, including those at S&P and Ned
Davis Research, say the recession began at the end of 2007. The only
question is how deep and how long the downturn will be. “Based on
Wednesday’s data, the probability is it will be longer than the average
recession,” says Ed Clissold, NDR senior global analyst.

Hurting sentiment was retail sales, which in
September suffered the steepest drop in three years. A Fed report that
showed that economic conditions weakened last month in all 12 of the
regional districts it tracks also drove home the message that the
credit crunch has infected the broader economy.

The S&P 500 index fell 9.0% to 908, still
above Friday’s low. The Nasdaq composite hit fresh lows for the year,
falling 8.5% to 1628.

“It is sort of the same old story: a lack of
confidence in the economy and markets,” says Douglas Peta, strategist
at J. & W. Seligman, adding that fear is still driving investment
decisions.

Todd Leone, a trader at Cowen & Co., says
that the gyrations signal that the market is still trying to find a
bottom. “I don’t want to break the lows,” he says, adding that he can’t
rule out lower lows.

If there is a silver lining, it is that stocks
tend to start rebounding “halfway” through recessions, says Jeff
Kleintop, market strategist at LPL Financial.

Source: USA Today

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