Wall Street endured another anxious session of extreme swings yesterday as investors sent stocks plummeting for the third time in a week, prompted by fears that another major European country would succumb to its debt problems.
The Dow Jones industrial average plunged 519.83 points, or 4.62 percent, erasing all the gains investors had recorded a day earlier and adding further evidence that markets are so tightly wound about the poor condition of global economies that the slightest hint of trouble will set off another wave of panic selling.
“Psychology and sentiment are for the moment destroyed,’’ said John Schlitz, chief US market technician at Instinet, a New York-based broker for institutional investors. “You basically had traders in there trying to figure out what to do. The problem with this market has been the unknown keeps coming back to haunt it.’’
Since the debt crisis showdown in Washington, D.C., in July, the Dow has lost more than 2,000 points, sparked by increasing concerns that the US economy will slide back into a recession and endanger corporate profits. Rising market volatility has investors on edge, fearing more of the same or worse.
“Four-hundred point moves are pathological - they’re not normal,’’ said Brian Bethune, an economics professor at Amherst College. “We have to go through this period and get some new base level the market can be comfortable with. But right now, the volatility is off the charts. It will settle down.’’
The latest unknown is whether one of the world’s largest economies, France, could be so overwhelmed by its debt that it could lose its top AAA credit rating, suffering a downgrade like the one handed by Standard & Poor’s to the United States last week. France has the highest budget deficit and debt among top-rated countries in the eurozone, and its finances could be further weakened if it has to bail out neighboring European countries in even worse condition.
With French bank stocks pummeled early in the day, President Nicolas Sarkozy cut short his summer vacation and returned to Paris and vowed the government would consider additional measures beyond the recently enacted package of spending cuts and tax increases to improve its finances. Also yesterday an analyst at Standard & Poor’s moved to reassure clients that additional measures, including an overhaul of its politically contentious pension system, put France ahead of the United States in reforming its finances, suggesting a credit downgrade wasn’t in the offing.
“So we do see more seriousness in addressing fiscal issues in France than in the US,’’ said the analyst, Nikola Swann, according to Reuters news service.
But back on Wall Street the developments in France were just another drumbeat of down news. Markets opened yesterday with a huge slide, only to recover mildly midday before concluding with a precipitous drop, the Dow falling nearly 200 points in the last hour alone.
The fear in the market continues to express itself in ironic ways. Yesterday, the US government reported that strong demand for a new $24 billion issue of debt, 10-year Treasury bonds - a benchmark for mortgages and other loans - sold at a record low interest rate of 2.108 percent. This just days after S&P stripped the government of its top credit rating, which normally results in bond issuers paying higher, not lower, interest rates to persuade investors to loan them money.
But in a global panic, US Treasury bills remain the standard refuge for investors who want their money in safe, readily available securities. Another venerable safe haven, gold, continued on its march up, surpassing $1,800 a ounce yesterday.
Money is flowing out of stock investments in huge sums. The Investment Company Institute in Washington reported yesterday that investors withdrew a net of nearly $17 billion from long-term mutual funds in the past week.
Bethune said the S&P downgrade of the United States and debt troubles of major European nations, most recently Spain and Italy, have been a lightning rod for investors. Bethune said members of Congress, in recess until after Labor Day, could help restore investors’ confidence when they convene a new panel charged with cutting $1.2 trillion from the federal budget soon.
The bipartisan panel was created under last week’s agreement to raise the country’s debt ceiling and is required to convene within 45 days of its official creation on Aug 2. Both political parties have been in the process of selecting members.
Some of the extreme moves in the markets have been compounded by so-called program trading, where investment companies have designed computers to initiate mass buying or selling based on price and other signals in the market.
“Computer trading accelerated in the past few days and increased the volatility for the overall market,’’ said X. Frank Zhang, a professor of accounting at Yale University School of Management, who has studied the trend.
For now, the giant stock swings appear to be a fact of life for the near future as events in Europe unfold, US politicians renew debt discussions, and consumer spending reports offer deeper insight, said Gus Faucher, an economist at Moody’s Analytics.
“The market is very concerned about a double dip,’’ Faucher said. “Things are going to be like this . . . until it becomes clear whether we’re getting over a soft patch or headed for another recession.’’WHAT NEXT?
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Megan Woolhouse can be reached at email@example.com.