Stocks sank hard Wednesday, weighed down by old fears and some new ones.
The Dow Jones industrial average dropped 360.92 points, or 2.6 percent, to 13,300.02. All 30 of the Dow industrials lost ground. Two stocks in the index, American International Group and General Motors, lost more than 6 percent.
It was the third 300-point drop in the Dow in less than a month.
The broader Standard & Poor’s 500 index tumbled 44.65, or 2.9 percent, to 1475.62. The Dow and the S&P 500 have given back all of their gains since the Federal Reserve staged the first of two interest rate cuts in September.
Losing stocks outnumbered winners by a 10-1 ratio among New York Stock Exchange stocks and a 4-1 ratio among Nasdaq stocks.
It takes many months for Federal Reserve interest rate changes to filter through the economy, said Bruce Bittles, chief investment officer for Robert W. Baird. Nonetheless, the benefits the Fed sought by lowering rates in September and October have been conspicuously absent in the stock market, he said.
“Consumer stocks went down, and financial stocks continued to go down even after the Fed lowered rates a second time,” he said. “That tells me that this time it’s not working, at least so far.”
On Thursday, Federal Reserve Board Chairman Ben Bernanke is scheduled to testify before the Joint Economic Committee of Congress on the health of the U.S. economy. In its last statement on interest rates and the economy a week ago, the central bank hinted it would pause in cutting rates because of concerns about inflation.
Bernanke is certain to face tough questions about the fallout from the subprime-lending debacle. In his last testimony to the committee, in late March, he said, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
“This will not be an easy session for the Fed chairman,” wrote Ward McCarthy of Stone & McCarthy Research Associates in his preview.
Sen. Charles Schumer (D-N.Y.) chairs the committee. On Wednesday, shares of mortgage lender Washington Mutual dropped more than 17 percent after New York Atty. Gen. Andrew Cuomo, a Democrat, charged there was a “pattern of collusion” in inflation appraisals of mortgages issued by Washington Mutual.
Late Wednesday, investment bank Morgan Stanley joined the parade of major financial institutions slashing the value of their assets linked to subprime mortgages. Morgan Stanley took a $3.7 billion write-down, saying the widely expected move would reduce fourth-quarter profit.
Bob Janjuah, chief credit strategist at the Royal Bank of Scotland, estimated in a report Wednesday that “this credit crisis, when it is all out, will see $250 billion to $500 billion of losses. The heat is on, and it is inevitable that more players will have to revalue a decent portion” of the loan-based assets.
Confessions by Wall Street powerhouses of losses connected to lax and abusive lending have been a principal element of the stock market’s latest woes. But the breadth of Wednesday’s sell-off indicated new pressures were in play.
In recent weeks, a rally in technology stocks and stocks linked to basic materials and commodities provided a welcome counterpoint to the woes of financial-services stocks.
But on Wednesday, “if you look across the board, nothing worked,” said Patrick O’Hare, market strategist for Briefing.com, an online investment-information service.
Commodity prices and commodity-based stocks eroded, as oil prices retreated from the recent assault on the $100-a-barrel milestone. Crude oil for December delivery closed down 33 cents a barrel, at $96.37, after reaching a record high of $98.62 earlier in the session.
Shares of Freeport-McMoRan, a leading mining company, dropped nearly 5 percent.
Technology stocks retreated, as well.
“While all this financial mess has taken place, people have been plowing into tech, which has seemed to be a safe haven,” said O’Hare. “Now you see a tech sector that’s probably ahead of itself.”
After the close of Nasdaq trading Wednesday, shares of computer-networking-developer Cisco Systems fell despite a quarterly report that met Wall Street expectations but failed to deliver a positive surprise investors were seeking.
“Our worst fears were realized,” an analyst told Bloomberg News.
Leading up to the report, Cisco shares had climbed nearly 5 percent in three days. The stock dropped 9 percent in after-hours trading Wednesday.
Long-standing concerns about the weak dollar received another jolt Wednesday, when a Chinese official renewed the prospect that China would diversify its foreign currency holdings away from the dollar.
“China is very good at jawboning,” said O’Hare. “They are going to show through some comments like this that they hold some cards that can make it very challenging for the U.S.”
Treasury securities rallied in the face of stocks’ decline. The Treasury’s auction of $13 billion of 10-year notes brought a yield of 4.35 percent, down from 4.49 percent at the 10-year auction in September.
Wednesday’s litany of headaches for investors overwhelmed an upbeat report on U.S. labor productivity. Productivity rose 4.9 percent in the third quarter, up from 2.2 percent in the second quarter and the best rate in four years. Greater productivity reduces inflation pressures in the economy.
———-
bbarnhart@tribune.com
