New York: Wall Street plunged anew on 3 August, the last trading day of the week, hurtling the Dow Jones industrial average down more than 280 points after comments from a major investment bank exacerbated the market’s fears of a widening credit crunch.
The drop of more than 2% in major stock market indexes was a fitting end to two volatile weeks on Wall Street and followed back-to-back, late-day triple digit gains in the Dow. This time, the catalyst for a sharp skid was Bear Stearns Cos. chief financial officer Sam Molinaro, who described turmoil in the credit market as the worst he’d seen in 22 years.
Stocks started the day with a decline after the government said jobs growth was not as strong as expected last month and a trade group reported that the nation’s service sector grew at a slower pace than expected in July. Then, credit concerns, which have dogged investors for months and have roiled markets since last week, further weighed on investor sentiment; Standard $ Poor’s Ratings Services lowered its credit outlook on Bear Stearns to negative from stable because of the investment bank’s exposure to the distressed mortgage and corporate buyout markets.
“I think there is a tremendous amount of uncertainty with regard to the credit markets and how the situation will ultimately settle,” said Mike Malone, trading analyst at Cowen & Co.
Investors remain worried that problems in subprime mortgages — those made to borrowers with poor credit histories — will force lenders to make credit less available. When people and companies can’t borrow money as easily, the economy tends to slow down.
“There is not going to be one sort of clear signal that suggests everything is OK,” Malone said, referring to the subprime and credit worries. “I think it’s going to take time and the equity markets are going to experience heightened volatility.”
Investors could be in for more tumultuousness in the coming week, which not only includes economic figures on productivity and consumer credit, but also brings a meeting of the Federal Reserve’s Open Market Committee, which has left short-term interest rates unchanged for the past year. Investors will likely be looking to its statement following its meeting for any word on the mortgage and credit markets.
The Dow fell 281.42, or 2.09%, to 13,181.91. As has been typical in recent selloffs, much of the decline came late in the session; the Dow lost more than 100 points in the final 15 minutes today. Despite the day’s loss, the index was off only 0.63% for the week.
Broader stock indicators also fell sharply. The Standard $ Poor’s 500 index dropped 39.14, or 2.66%, to 1,433.06, and the Nasdaq composite index fell 64.73, or 2.51%, to 2,511.25.
The concerns have pulled stocks from highs seen only weeks ago. The Dow, which on 19 July closed above 14,000 for the first time, now sits about 819 points below that level. That 5.9% decline puts the Dow more than halfway toward the technical threshold of a correction, which is 10%.
Small-capitalization stocks were hit hard again, partly because the global economy appears to be growing faster than that of the United States. Investors often contend profits at larger companies are more likely to hold up amid a US slowdown because much of their business is drawn from overseas. The Russell 2000 index of small-capitalization stocks fell 28.57, or 3.64%, to 755.42.