Dow Drops Under 10000 as Bank Woes Persist

OCTOBER 6, 2008, 4:57 P.M. ET

Deepening fear that the global economy is ailing beyond the capacity of policy makers to cure it sent stocks into a downward spiral Monday.

Many traders believe the bloodletting could continue in the days ahead even though major market averages have now touched multi-year lows, punishing freewheeling Wall Street bettors and conservative buy-and-hold investors alike.

The Dow Jones Industrial Average, which was off 800 points at its intraday low, ended down 369.88 points, or 3.6%, at 9955.50, hurt by declines in all 30 of its blue-chip components. The Dow finished below 10000 for the first time since late October 2004, and it has slid 12.8% since the meltdown of Lehman Brothers Holdings threw Wall Street into crisis in mid-September.

Markets were rattled overnight after German regulators moved to guarantee all the country's bank deposits and to rescue Hypo Real Estate Holding, the latest in a series of bailouts in Europe. Government officials and corporate executives in seven other European nations also met to save various financial institutions around the region. The moves kept concern about further bank failures around the world high and sent European stock markets sliding, setting a bleak tone for trading before the opening bell in New York on Monday.

The news in Europe came on the heels of last week's contentious passage of a $700 billion rescue package in the U.S. for ailing banks. And on Monday, the Federal Reserve said it would begin paying interest on commercial banks' reserves and expand its loan program for squeezed financial institutions.

But the notion that there will be no quick fix for the problems besetting Wall Street -- and the global economy – took firmer hold among market participants of all stripes on Monday.

"We're seeing pure fear right now," said Don Bright, of the Chicago proprietary firm Bright Trading. "My guys who usually trade 5,000 shares at a time are now trading 1,000 or 2,000. They're a lot more skittish."

That attitude seemed to be widespread Monday and could mean there are more losses to come, said Doreen Mogavero, president and chief executive of the New York floor brokerage Mogavero Lee & Co. She said that Monday's decline, although bloody, didn't seem like a round of capitulation, or last-ditch selling to mark a market bottom.

"Yes, it's a big move, but there hasn't been the sort of volume behind it that we'd like to see," in order to confirm that there isn't another wave of sellers still waiting on the sidelines, Ms. Mogavero said.

She added: "People are looking at the [stock] market's fundamentals and realizing how long it's going to take to see some real relief."

 

What's Driving the Dow's Fall

4:09

The Dow Jones Industrial Average falls below 10000 as financial turmoil in Europe heightens. WSJ's David Gaffen parses the reasons behind the drop and how soon we can see the effects of the recently passed bailout bill. Kelsey Hubbard reports. (Oct. 6)

Other stock measures were hit hard. The technology-oriented Nasdaq Composite Index dropped 4.3% to end at a four-year low 1862.96. The small-stock Russell 2000 fell 3.8% to 595.91, a three-year low.

The S&P 500 slid 3.9% to 1056.89, the lowest close in nearly five years. All its sectors fell Friday, led by by technology, which tends to suffer when investors' risk appetite ebbs. The sector fell 5.5%.

With stocks plunging, indicators of investor anxiety flashed. The Chicago Board Options Exchange's Volatility Index, a key measure of investor fear, leapt 15.3% to 52.05.

Credit markets also continued to show signs of stress. The cost of borrowing overnight U.S. dollar funds in the interbank market had risen to 2.36875%, up from Friday's fixing of 1.99625%. Yields also fell sharply as investors again flocked to U.S. government debt. The yield on the three-month Treasury bill fell below 0.5%, showing that investors are willing to accept almost no returns in exchange for the certainty that they'll get their cash back in hand after marking a short-term loan to the government.

The benchmark 10-year note gained a full point to yield 3.477% as investors rushed to move money into Treasurys and away from riskier assets like shares.

Oil futures tumbled $6.07, or 6%, to $87.81 a barrel, hurt in part by traders' concerns that fuel demand will suffer as the global economy slows in the months ahead.

Commodity traders rushed in an attempt not to get steamrolled as their market moved in tandem with the major stock-market indexes – an increasingly familiar drill. As the stock market falls, hedge funds and other deep-pocketed speculators tend to get margin calls from their stock brokers, which in turn prompts selling of commodities to raise capital.

Anticipating how investors are using trend-following computer programs to bet on a drop in demand for energy is "crucial" when the crude oil markets are affected by the momentum of the broader stock market, he said. "For a while it was the dollar. Right now it's the S&P," he said.

Other raw materials suffered from fears of weakening demand. The Dow Jones-AIG Commodity Index ended down 5.1%.

Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity selloff. Futures on the yellow metal leapt $33.80, or 4.1%, to $862.70 per ounce in New York.

"The stock market is down so much, it is sucking up capital out of everything, except for gold," said Mark Waggoner, president of Excel Futures Inc., a brokerage in Newport Beach, CA.

He said he got numerous calls from clients and didn't even have time for lunch. "I am getting to the point where I didn't want to take any phone calls," he said.

In economic news, the Conference Board said its employment trends index, an aggregate of eight labor-market indicators, fell 0.8% to 108.4 in September, down from a revised 109.3 in August. The index is down almost 10% from a year ago, suggesting that the U.S. labor market is likely to deteriorate sharply in the months ahead.

"The deterioration in the Employment Trends Index has become very pronounced, suggesting that the unemployment rate may very well exceed 7% as early as the second quarter of 2009," said Gad Levanon, senior economist at the Conference Board. "The persistent slackening in labor market conditions, worsened by the financial crisis, has reached a level that in the past led to significantly slower wage growth across most industries."

Charles Evans, president of the Fed's Chicago branch, said in a speech at an event sponsored by the Association for Technology in Lost Pines, Texas, that U.S. economic growth is "likely to be quite sluggish" into 2009, with the timeline for any recovery quite uncertain.

The dollar was mixed against major rivals. One euro recently cost $1.3506, down from $1.3806 late Friday. A dollar fetched 101.58 yen, down from 105.14 yen.

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