4-year low

Investors bail out of stocks, send Dow Jones plummeting past 10,000 benchmark

October 07, 2008|By Eileen Ambrose | Eileen Ambrose,eileen.ambrose@baltsun.com

Fearing that the credit crunch is rapidly spreading worldwide and won't be quickly fixed by government rescue plans, investors bailed out of stocks yesterday and sent the Dow Jones industrial average down nearly 800 points by midafternoon.

The market rebounded in the last hour and a half of trading, although the Dow still lost 369.88 points for the day to close at 9,955.50. It marked the first time in four years that the index had closed below 10,000, a psychological benchmark for many investors.

"Just about everything these days has a psychological impact on investors," said Jerry A. Miccolis, a senior financial adviser at Brinton Eaton Wealth Advisors in New Jersey. "What's difficult to predict is how they will react. Right now, they are reacting negatively to everything."

The steep sell off came despite the fact that President Bush signed the $700 billion rescue plan Friday, raising fears that the economy's troubles are more serious and far from over. Investors are increasingly nervous about the paralysis in the credit markets that has started to affect companies trying to borrow for acquisitions or just to conduct their daily operations.

The problems are spreading worldwide. European countries took emergency steps over the weekend to prop up their financial systems. And even before the U.S. market opened yesterday, stocks were down in Japan, Britain, France and Germany.

"How could someone not be nervous about what is going on?" asked David Citron, a principal at WMS Partners in Towson. "The bear markets before, there always were places to hide. There don't seem to be a lot of places to hide right now.

"It's a very difficult time to assess the correct investment strategy," Citron said. "I don't like the idea of selling into a 500-point down day."

Other major indexes also lost ground yesterday. The Nasdaq composite index dropped 84.43 points, or 4.34 percent, to close at 1,862.96. The Standard & Poor's 500 index dropped 42.34 points, or 3.85 percent, and ended at 1,056.89. At its low points, the Nasdaq fell about 9 percent while the S&P was down about 8 percent.

But it was the Dow's 30-stock index that commanded investors' attention when it seemed in midafternoon that the Dow's steep decline would set a new record for the biggest one-day point drop. That record was set last week when the Dow closed down 777.68 points after the House of Representatives could not muster the votes needed to pass the bailout plan.

Just 264 stocks rose on the New York Stock Exchange yesterday - and 2,986 dropped. That's a telling sign, considering that the stock market is a leading economic indicator, with investors tending to buy and sell based on where they believe the economy will be in six to nine months.

With stock prices falling, Bush twice made unscheduled remarks on the economy, saying in Cincinnati that the economy would be "just fine" but that the federal bailout package needed time to work.

The troubles that started with an overheated housing market in the United States have infected financial markets around the world, making banks fearful of lending to other banks, let alone to businesses and consumers. That has led to worries that economies around the world might not only sputter but slide into reverse.

Though the Dow regained some ground yesterday, it still closed below 10,000 - a figure that elicits emotions from many investors. The last time the market closed below that figure was Oct. 26, 2004, when the Dow reached 9,888.48.

"Many people in the market get over-hung up on supposed magical levels, and a big round number like 10,000 is widely watched," said Al Goldman, chief market strategist with Wachovia Securities in St. Louis. "But breaking them can be just as widely watched and can bring in additional selling pressure."

The drop below 10,000 won't have the same impact for every investor, said James Angel, associate professor of finance at Georgetown University.

Some "might think the end is near, the sky is falling and it's time to sell everything," he said.

Others will see it as a signal that stocks are cheap and it's time to buy, he said. Angel said yesterday afternoon that he plans to take advantage of the steep market drop to buy more stock.

Market experts, though, said the 10,000 benchmark carries more weight with investors than it should.

It has nothing to do with the future of companies, the credit market problems or the banking system, Goldman said.

"It is just a level. It magnifies fear for the very short term," he said.

The Dow is down almost 30 percent from its all-time high of 14,164.53, set a year ago Thursday.

Daniel McHugh, president of Lombard Securities in Baltimore, said seasoned investors consider a 30 percent decline in the S&P index typical for a recession.

"That's about where we are right now," said McHugh, who has been in the industry for 39 years. "This might be more than the average recession."

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