U.S. stocks drop most in five weeks

Sept. 22, 2011, 6:55 p.m. EDT · CORRECTED

U.S. stocks drop most in five weeks

Federated’s Orlando watches 1,100 level on the S&P 500

By Kate Gibson, MarketWatch

A previous version gave the incorrect date of Ben Bernanke’s Jackson Hole, Wyo. speech. It was delivered on Aug. 26.


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NEW YORK (MarketWatch) — U.S. stocks were thrashed Thursday, with the major indexes taking their hardest single-day hit in five weeks, amid widespread selling of stocks and commodities on escalated fears about the global economy.

“This is a class example of indiscriminate selling to raise cash, it’s not a selective process here,” said Art Hogan, head of product strategy, equity research at Lazard Capital Markets.

After falling almost 528 points during the session, the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -3.51% finished with a drop of 391.01 points, or 3.5%, at 10,733.83.

The battering left the Dow nearly 14 points above its lowest close for the year and represented its steepest drop since Aug. 18.

All 30 of the blue-chip index’s components lost ground, with United Technologies Corp. /quotes/zigman/244482/quotes/nls/utx UTX +0.16% hardest hit, its shares tumbling 8.8%. Read more on United Tech's deal for Goodrich.

Over the last two sessions, the Dow has lost 5.9%, the largest two-day percentage drop since Dec. 1, 2008, near the peak of the financial crisis.

The S&P 500 Index /quotes/zigman/3870025 SPX -3.19% declined 37.20 points, or 3.2%, at 1,129.56, with natural-resource and energy stocks slammed the hardest. It was also the S&P 500’s worst percent loss since Aug. 18.

The Nasdaq Composite Index /quotes/zigman/123127 COMP -3.25% shed 82.52 points, or 3.3%, at 2,455.67, the worst retreat since Aug. 18.

For every stock rising, nearly 11 fell on the New York Stock Exchange, where more than 1.7 billion shares traded. Composite volume neared 7 billion.

FedEx Corp. /quotes/zigman/254280/quotes/nls/fdx FDX +1.38% added to the bearish tilt, its shares falling 8.2% after the shipper cut its 2011 profit outlook and its CEO told a conference call that he expected sluggish growth would continue, although he does not expect the U.S. to fall back into a recession.

The negative sentiment taking hold among investors is “driven by the bank runs in Europe, and some of the European banks are rumored to be looking in the Middle East for capital; it’s like a replay of 2008 for some of the U.S. banks,” said Charlie Smith, chief investment officer at Fort Pitt Capital.

The Financial Times reported that the European Union was speeding up the recapitalization of 16 mid-tier E.U. banks that were close to failing recent stress tests. Read more on E.U. bank recapitalization.

“When you talk about bank recapitalizing and going to places like Dubai to do it, everything echoes back to 2008 except economic fundamentals,” said Lazard’s Hogan.

Smith also pointed to Europe’s solvency issues, saying Greece is not a major issue, given “it’s only 2% of the euro zone, but Italy would be.”

U.S. stocks were part of a global stock selloff as investors also reacted to the Federal Reserve’s statement late Wednesday. The central bank warned of risks to the economic outlook and unveiled a bond-swap program, seen as something that would have minimal sway in revitalizing growth. Read more on Fed's bond-swap program.

Technical issues are also in play, according to Phil Orlando, chief equity market strategist at Federated Investors. “We need to successfully retest 1,100 on the S&P; we’re getting close,” he said.
Fed factor

The market’s reaction to the Fed was in large part “buy the rumor and sell the news” trade, as the central bank’s stance that it would replace short-term debt with longer-term Treasury bonds was widely anticipated, Orlando commented.

Since Federal Reserve Chairman Ben Bernanke began telegraphing the central bank’s intention in his speech at Jackson Hole, Wyo., on Aug. 26, through Tuesday, the S&P 500 climbed about 7.5%, going from the intraday low to the intraday high.

As Orlando put it: “They tell you what they are going to do, the market prices it in; they when they do it, and the market takes profit.”

The Fed’s use of the word “significant” in describing risks to the global economy also caused discomfort, he added.

The dollar and Treasurys rallied, sending yields on the 10-year note /quotes/zigman/4868283 10_YEAR -7.66% down 13 basis points to 1.72%. Read more on bonds.

Commodities fell hard, with gold futures for December delivery /quotes/zigman/661658 GC1Z +0.07% sinking $66.40 to finish at $1,741.70 an ounce. Crude futures for November delivery /quotes/zigman/2075833 CL1X +0.01% dropped $5.41 at $80.51 a barrel. Read more on gold futures and read more on oil futures.

Casting a pall over global resource demand, HSBC’s preliminary China Manufacturing Purchasing Managers’ Index fell to a two-month low in September, signaling a broad slowdown in China’s economy. Read more on China data.

The Stoxx Europe 600 index /quotes/zigman/2380150 XX:SXXP -4.63% dropped 4.6%. The FTSE 100 /quotes/zigman/3173262 UK:UKX -4.67% index lost 4.7%. The Japan’s Nikkei 225 /quotes/zigman/5986735 JP:NIK -2.07% fell 2.1%, while Mexico’s IPC Index lost 4.8%.

U.S. economic data on Thursday had U.S. leading indicators increasing 0.3% in August; a gauge of home prices rising 0.8% in July; and fewer people submitting new claims for unemployment benefits, although the decline still left applications above 400,000. Read the latest on weekly jobless claims.

On Wednesday, stocks declined sharply in the final 30 minutes of trading, with the Dow industrials finishing with a loss of nearly 300 points, after the Federal Reserve said that it would rebalance its portfolio, as had been expected, but that it also saw “significant downside risks to the economic outlook,” citing Europe as an issue.

“The Fed cannot engender growth; the Fed cannot engender risk-taking. What it can do is buffer declines, but let’s see a real decline,” said Smith at Fort Pitt Capital, pointing out that the S&P 500 is down 5.8% for the year to date, on a total return basis. “Let’s talk when we make it 18% or 20%. The Fed is going to hold their fire until they see the whites of people’s panicked eyes.”


Kate Gibson is a reporter for MarketWatch, based in New York.

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