Bad news piled up Tuesday to push the Dow Jones industrial average to its sharpest single-day point decline since the first trading day after the terrorist attacks of Sept. 11, 2001.
A sell-off in the Chinese stock market, recessionary speculation from former Federal Reserve Chairman Alan Green span, a weak manufacturing report and a technical trading glitch combined to send the markets tumbling.
The Dow – which tracks 30 blue-chip stocks, including Microsoft, Wal-Mart and Boeing – dropped by more than 500 points before recovering to close down 416.02 points, or 3.29 percent, at 12,216.24.
Analysts were divided on whether the market drop would be a short-term phenomenon or indicative of deeper economic troubles.
The Dow’s percentage decline was modest in historical terms, not even ranking among the top 20 all-time percentage drops since 1950. The Dow declined by more than 4 percent on two dates in 2002.
The broader Standard & Poor’s 500 was down 3.47 percent on Tuesday, and the tech- heavy Nasdaq index dropped 3.86 percent. Investors in U.S. stocks lost an estimated $632 billion on the day, according to Standard & Poor’s.
Colorado companies weren’t spared the downdraft. Of the 110 stocks in the Bloomberg Colorado Index, 97 posted declines, including Chipotle and Crocs.
Some economists and analysts said the market was girding for a possible recession later in the year, while others said stocks were simply staging a reasonable and needed correction.
Large stock declines can affect consumer attitudes, making consumers feel less wealthy and likely to cut back on spending, which can in turn affect the U.S. economy, said University of Colorado economist Richard Wobbekind.
Too early to know
But it’s too early to know whether that will happen now, he said.
“It needs more than a day,” Wobbekind said. “We tend to look at these things in a broader time frame.”
Others saw Tuesday’s market action as a necessary break in a long market rally in which investors lost sight of the risks of stocks.
“The market was looking for an excuse to sell, and China was a big one,” said Vitaliy Katsenelson, portfolio manager with Investment Management Associates in Denver.
Tuesday’s bloodletting continued when trading began in Asia today, Tuesday evening Colorado time.
Shares in Tokyo, Hong Kong, Singapore, Malaysia, Australia, New Zealand, the Philippines and Indonesia tumbled more than 3 percent in morning trading. In China, stocks modestly recovered from their biggest drop in a decade. The Shanghai Composite Index was up 1.2 percent to 2,804.28.
But investors in other Asian markets were dumping shares today, with Japan’s Nikkei 225 stock index down 644.85 points, or 3.56 percent, to 17,475.07 at the close of the morning session.
Hong Kong’s Hang Seng Index was down 3.8 percent, while Australia’s benchmark S&P/ASX200 index shed 3.5 percent. Indonesian shares lost 5.2 percent, while Philippine stocks plunged 9.4 percent.
And in Singapore, the Straits Times index tumbled 142.77, or 4.4 percent, to 3,089.25 as of 10:17 a.m. local time, adding to its 2.3 percent drop Tuesday.
Sell-off began in China
Asia had led the way down before U.S. markets opened Tuesday. The Shanghai Composite Index on Tuesday corrected 8.8 percent on fears that the Chinese government would crack down on stock speculators, who have helped Chinese stock-market indexes double over the past year.
Prior to that, in remarks made to an investor conference in Hong Kong via satellite, Greenspan raised the prospect of a recession.
“When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan reportedly said.
The Dow dropped more than 100 points in early-morning trading. Then came a report showing durable-goods orders fell a sharp 7.8 percent in January as demand for military and civilian aircraft, autos and trucks and communications equipment dropped. Economists had expected only a 3 percent decline.
The Dow trended down throughout the day, then dropped a dizzying 178 points in a minute around 1 p.m. Denver time, an hour before closing.
Heavy trading volumes forced New York-based Dow Jones & Co. to switch to another data server, which instantly calculated the effect of trades done earlier in the day, Dow Jones spokeswoman Sybille Reitz told Bloomberg News.
Market safeguards to protect against huge selling surges failed, veteran investor James Cramer wrote in his column on Thestreet.com.
Sell orders coming from exchange-traded funds may have caused the market to lurch sharply lower despite plenty of buyers willing to meet demand, he speculated.
“As the Dow Jones went from -275 to -545 in less than 15 minutes around 1 p.m., I heard my trader upstairs yell, ‘What just happened?”‘ said Sam Jones, a money manager with All Seasons Financial Advisors in Denver.
Investors complacent
An eight-month rally that had pushed the Dow to record highs – and the Nasdaq and S&P 500 to six-year highs – had made investors complacent and stock markets vulnerable, said Katsenelson.
The broader S&P 500 index fell 50.33, or 3.47 percent, to close at 1,399.04. The Nasdaq composite index, heavy in technology companies, was off 96.66, or 3.86 percent, at 2,407.87. Exchanges from Brazil to Canada moved lower.
Commodity producers, who have benefited from strong demand for raw materials by Chinese manufacturers, were hard hit. But even stocks focused on U.S. consumers and with no ties to China got clobbered.
Stocks in other emerging markets and Europe had some of the largest declines. Domestically, small-cap growth, technology, finance and consumer discretionary suffered the biggest losses, said Jones.
Categories that held up better than the S&P 500 were pharmaceuticals, Japan, health care, consumer staples, utilities and semiconductors. Even gold, typically seen as a refuge in market declines, slipped on fears of weaker demand.
Investors ignored reports showing that consumer confidence had reached its highest levels since August 2001 and that existing-home sales enjoyed their largest rebound since January 2005.
Home resales rose 3 percent in January to 6.46 million, beating expectations of 6.24 million in sales. Median existing-home prices in January, however, dropped 5 percent compared with December.
The Associated Press and Bloomberg News contributed to this report.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
