Wall St. Slide Fuels Worries on Economy

Stock markets around the world plummeted yesterday in a wave of selling set off by a plunge in China that was reinforced by worries of weakening economies. The falling prices continued in early Asian trading today, but by midmorning the Chinese market seemed to be stabilizing.

While China was the first market to tumble, it was not clear what set off the selling. But once it began, it spread first to other Asian countries, then to Europe and the United States.

“It was sort of one of those days where somebody snaps their fingers, and the market’s hypnotic trance is over,” said Stuart Hoffman, chief economist of PNC Financial.

In China, where the stock market had been soaring, the government had warned banks about improper loans to finance stock speculation.

In America, the selling seemed to add to worries that a decline in the housing market, and problems in particular with loans to risky borrowers, could spill over. And a report yesterday indicating that orders for durable goods — items like washing machines and computers — were surprisingly weak in January revived doubts about the strength of the American economy.

Alan Greenspan, the former chairman of the Federal Reserve, in a speech transmitted to a business conference in Hong Kong on Monday, warned that a recession was possible in the United States later this year. In so doing, he seemed to distance himself from Ben S. Bernanke, the current Fed chairman, who has been much more upbeat.

Noting that global markets have been strong for years, Mr. Hoffman said: “We’ve had this ‘What me worry?’ mentality. And this is a little bit of a wake-up call.”

The Dow Jones industrial average fell as much as 546 points yesterday afternoon, before closing down 416.02 points, or 3.29 percent. In percentage terms, it was the worst day for the market since March 2003. In terms of points, it was the steepest slide since the first day the market resumed trading after the Sept. 11 terrorist attacks in 2001.

The Standard & Poor’s 500-stock index, the benchmark index for many investors, slid 3.47 percent, and the technology-heavy Nasdaq composite index fell 3.86 percent. All three major indexes erased their gains for the year.

The sell-off left almost every major stock lower, including all 30 stocks in the Dow industrials and all but two in the S.& P. 500 and one in the Nasdaq 100.

As the 4 p.m. closing bell finally rang at the New York Stock Exchange, traders on the floor erupted with hearty boos.

At the close, said Howard Silverblatt, an index analyst with Standard & Poor’s, the S.& P. 500 had lost $452 billion in market value, and other American stocks had shed an additional $180 billion.

After steady declines in all markets, panic seemed to hit the American market just before 3 p.m., perhaps caused by sell programs that went off at 2:52 p.m., when the S.& P. 500 fell to the point where it was down 3 percent for the day. Within 10 minutes, it had fallen to its low for the day, down 4.3 percent. It ended with a loss of 3.5 percent.

Investors once took such big falls in stride, but in recent years no such thing has happened as volatility has largely evaporated from the market.

There were some technological problems yesterday. Dow Jones, which calculates the Dow industrials, said its system fell behind shortly before 3 p.m., and that a big fall was shown when the backup system came on. But Standard & Poor’s, which calculates the S.& P. 500, said it knew of no similar problems with its calculations.
Despite the tumble, the Dow is down only 4.4 percent from its record high reached last week. And the sell-off was not severe enough to set off any of the circuit breakers the New York Stock Exchange has put in place to help minimize big losses.

One sign of the nature of the sell-off was what went up. United States Treasury prices soared, and yields fell, as some investors sought safety. The yield on a 30-year Treasury bond, which was as high as 5 percent less than a month ago, fell from 4.73 percent to 4.64 percent.

“Treasuries rally, the stock market sells,” said Ethan Harris, chief United States economist for Lehman Brothers. “It’s kind of a classic risk-aversion reaction.”

If the rout in the markets is sustained, it will be the first major test for Mr. Bernanke. Two weeks ago, he said the Fed saw inflation as a greater threat than economic weakness.

“You’ve got a certain cavalierness about market-driven economic signals from the new academic-driven Fed,” said Robert Barbera, the chief economist of ITG, an advisory firm.

Mr. Barbera said that Mr. Greenspan gave more attention to market indicators than Mr. Bernanke has.

The selling yesterday began in Shanghai, which had hit a record on Monday. But in tumultuous trading yesterday, the Shanghai composite index plunged nearly 9 percent.

Stephen Green, a senior economist and stock market analyst working in Shanghai for Standard Chartered Bank, said the market fundamentals had not changed drastically in recent weeks, adding that the stock markets in China tended to be volatile, particularly after reaching record highs.

“People are just on edge,” he said. “It’s very possible in two weeks we’ll be right back up there.”

The sell-off in China started a few hours before an explosion was reported at an American base in Afghanistan. It killed a number of people but did not injure Vice President Dick Cheney, who was inside the base at the time.

Other Asian markets followed China lower yesterday. Tokyo, Asia’s largest stock market, which fell only 0.5 percent yesterday, opened sharply lower this morning. By mid-day, the Nikkei 225 was down about 3 percent, to 17,548.52. The market in Australia also fell about 2 percent this morning, but Chinese indexes were mixed, with some showing small gains.

Yesterday, there was also a sharp rise in the Japanese yen.

“People are unwinding the carry trade,” Mr. Barbera of ITG said of Tuesday’s trading. In that trade, which has been very popular with hedge funds, traders borrowed yen, at very low interest rates, and then invested the money in assets in other countries.

“Now you try to get closer to shore,” said Mr. Barbera, saying that traders had sold investments and used the proceeds to repay their yen borrowings.

source:www.nytimes.com