AD Header Dropdowns

AD Main Menu

Huge 275-point plunge by Dow smells like a recession

Ron SchererThe Christian Science Monitor
Aaron Jansen illustration

Spooked by a weak report on jobs in May, the stock market dropped sharply on Friday with the widely watched Dow Jones Industrial Average falling 274.88 points to 12118.57, which resulted in the average moving into the red for the year.

The selloff on Friday was the worst day of the year for the market and followed a bad month in May, when the Dow average lost about 6 percent of its value. On Friday, in a scene reminiscent of last August, when Congress could not agree on ways to resolve debt-ceiling crisis, investors sought the safety of US Treasury securities, driving the yield in the 10 bond down to 1.46 percent, a post-World War II low.

The direction of the stock market can be an important barometer. When the market is moving higher, many Americans feel more wealthy and spend more money. A falling stock market can cause companies to defer building new plants as they try to figure out whether the market knows something they don’t and is warning them to run for cover.

Behind the market’s latest swoon is some troubling global news, market analysts say. European economic data seem to indicate most of the eurozone countries are already in a recession. Economic data in China also seem to indicate the economy there is slowing down. And, finally, the US jobs data may be indicating some fundamental weakness that had not been anticipated.

“Investors had been hoping the US was a safe haven in all this,” says Sam Stovall, chief equity strategist at Standard & Poor’s in New York. “They are reacting to a widening and accelerating risk of recession.”

That risk was apparent from the opening bell as investors scrutinized the May jobs report, which showed the economy had created only 69,000 new jobs. Wall Street economists had been expecting a gain of 150,000 jobs. The Dow average opened with a triple-digit loss, which it never made up all day.

“What we saw was a violent rip tide effect,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “It unnerved the institutional investors and those who could raise cash did,” he says. “Everything was beaten down.”

As investors raised cash, they moved it to the US Treasury market or any other sovereign debt that appears to be safe, says Eric Stein, a portfolio manager at Eaton Vance Investment Managers in Boston. “By any historic measure the yields are not attractive but more importantly people have confidence they will get their money back,” he says.

Mr. Stein thinks the big selloff in the markets may prompt some sort of coordinated central bank response. If the Federal Reserve, for example, is planning to try to do some monetary stimulus that might become more apparent next week when Fed chairman Ben Bernanke speaks.

“He has not been hinting at this but given the data and the panic in the market, that might change his tune,” says Stein. “One of the benefits of lower interest rates is that might get people back to investing in risk assets – once they come out of their bunker.”