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By TIM PARADIS and STEVENSON JACOBS, AP Business Writers Tim Paradis And
Stevenson Jacobs, Ap Business Writers Thu May 20, 6:44 pm ET
NEW YORK Stocks took their deepest plunge in more than a year Thursday as
fears grew that Europe's debt crisis could spread around the world and
undermine the U.S. economic recovery. The possibility has been brewing for
weeks, but analysts said some investors are just waking up to it.
The Dow Jones industrial average fell 376 points, its biggest point drop since
February 2009. All the major indexes were down well over 3 percent and are now
showing losses for 2010. Interest rates fell sharply in the Treasury market as
investors once again sought the safety of U.S. government debt.
The number of people applying for unemployment benefits last week rose
unexpectedly and the Greek government's response to its debt crisis sparked new
protests in Athens, but analysts said neither event appeared to set off
Thursday's selling.
They said more investors seemed to be grasping the possibility that the U.S.
recovery could be in jeopardy, and that many were realizing that the stock
market's big rebound since March 2009 may not have been justified.
"The economic recovery story has started to look like a mirage," said Tom
Samuels, manager of the Palantir Fund in Houston. "If that's correct, stock
prices are well ahead of economic reality."
Investors are concerned that the debt problems in countries like Greece and
Portugal will spill over to other countries in Europe, cause a cascade of
losses for big banks and in turn halt economic recovery in the U.S. and
elsewhere.
"It's starting to look like one of these tragic stories were one person falls
through the ice, then everyone else rushes in to help and ends up drowning,"
independent market analyst Edward Yardeni said.
They're also worried that China might take steps that will limit its economic
growth, which would also affect the U.S. recovery. Analysts said the market is
vulnerable to rumors about any of the major economies right now.
The Standard & Poor's 500 was down almost 12 percent from its closing high for
the year, which was reached April 23. Most analysts consider a drop of more
than 10 percent from a recent high to be a "correction." This is the market's
first correction since stock indexes hit a 12-year low in March last year. The
fact it has occurred in just 19 trading days shows how anxious traders are
right now.
The Chicago Board Options Exchange's Volatility Index known as the market's
fear gauge leaped almost 30 percent to its highest level since March 2009.
The increase in the VIX signals that traders are bracing for more drops in the
market.
The VIX closed at 45.79, nearly three times its 2010 low of 15.73, reached
April 20. But it's about half of the record high of 89 it reached in October
2008 at the height of the financial crisis.
Analysts said traders were retreating from any investment thought to be too
dangerous to own right now. That has meant heavy selling in stocks, commodities
and troubled currencies like the euro.
Investors appear increasingly convinced that European countries will need to
adopt stringent spending cuts to pay down their heavy debt loads, Yardeni said.
Such cuts would likely lead to long economic slumps for those countries, a
prospect that investors may now be accepting as reality as they sell stocks and
the euro, the currency shared by 16 European nations, he said.
The euro, a key indicator of confidence in Europe's economy, managed to rise to
$1.2491 in late afternoon trading, a day after hitting $1.2146, a four-year
low. The euro began the year at $1.4325.
"The drop in the euro is the initial phase of a long-term, multiyear economic
decline in Europe," Yardeni said. "It shows a declining confidence in the
workability of the EU (European Union) monetary union, and that's why their
stock markets are down."
The Dow has fallen 1,137 points, or 10.2 percent, since hitting its 2010 high
April 26. It has fallen by at least 100 points in nine of the 19 trading days
since its peak.
The Dow fell 376.36, or 3.6 percent, to 10,068.01. The S&P 500 fell 43.46, or
3.9 percent, to 1,071.59. The drop was the worst for the Dow since February
2009, and the S&P's worst since April 2009.
All of the 30 Dow stocks fell, while 497 of the 500 S&P stocks closed lower.
The Nasdaq composite index fell 94.36, or 4.1 percent, to 2,204.01, its largest
percentage drop since February.
At the New York Stock Exchange, only 153 stocks rose compared with 2,994 that
fell. Volume came to a heavy 2.1 billion shares.
Bank of America Corp. had the biggest percentage drop in the Dow. It fell
$3.25, or 6.3 percent, to $15.28. Sears Holdings Corp. had the worst percentage
drop in the S&P 500, falling $10.86, or 10.9 percent, to $88.70 after reporting
first-quarter earnings.
The dour market got some confirmation from a Federal Reserve official that
Europe's problems could be a "potentially serious setback." Fed Gov. Daniel
Tarullo said that if the debt crisis curbed lending and the flow of credit
globally, that would endanger both the U.S. and global recoveries.
"Although we view such a development as unlikely, the swoon in global financial
markets earlier this month suggests it is not out of the question," he said in
prepared remarks.
A private research group, meanwhile, reported an unexpected drop in its index
of leading economic indicators, a sign that growth could slow this summer. The
Conference Board's index of future economic activity slipped in April for the
first drop since the stock market's bottom last year.
As investors pulled out of stocks and other risky investments like commodities,
they moved into safer investments such as U.S. Treasurys. The yield on the
benchmark 10-year Treasury note, which moves opposite its price, fell to 3.22
percent from 3.37 percent late Wednesday.
Commodities prices fell as investors speculated that a weak world economy would
curtail demand for raw materials. Crude oil fell $1.86 to $68.91 per barrel on
the New York Mercantile Exchange.
Traders were trying to anticipate the scenarios that could occur as Europe
struggles to contain its debt problems.
"There's a question out there now that potentially we could be talking about a
collapse of the eurozone or countries breaking away from the euro," said Tim
Quinlan, an economist at Wells Fargo & Co. As recently as four months ago, that
wasn't even considered to be a possibility, he said.
Such a stark change in views has unnerved investors, but analysts said they
weren't seeing signs that fear is sweeping the market.
"These are not panic losses," said Todd Colvin, a vice president at MF Global
Inc. in Chicago. "These guys are taking some profits off the table and taking
some capital where they know it will be safe. And where's that? That's cash or
even Treasurys."
High unemployment remains one of the biggest obstacles to a sustained recovery
in the U.S., and concerns about it grew when the Labor Department said new
claims for unemployment benefits rose by 25,000 to 471,000, their largest
amount in three months.
That came as an unpleasant surprise to investors who were expecting a slight
drop. The latest report snapped a streak of four straight weekly drops and
questioned the strength of the job market.
Greek workers, meanwhile, again took to the streets protesting recently
approved budget cuts that were necessary for the country to receive a bailout.
Greece was able to repay debt that came due Wednesday only because it had
access to a rescue package from the European Union and International Monetary
Fund.
In overseas stock trading, Britain's FTSE 100 fell 1.6, Germany's DAX index
dropped 2 percent, and France's CAC-40 lost 2.3 percent.