Stocks: An Unhappy Anniversary

Twenty years to the day after Black Monday, major indexes shed more than 2% amid poor earnings and more signs of credit problems

by David Bogoslaw

Deja vu all over again, as Yogi Berra used to say? Not quite, but memories of the 1987 stock market crash may have unsettled equity investors as Wall Street marked the 20th anniversary of Black Monday with a big stock sell-off.

Major U.S. stock indexes finished sharply lower on Friday -- recording the biggest losses since late July -- reflecting renewed worries about slowing U.S. economic growth, spurred by a negative outlook by Caterpillar (CAT) and further signs of trouble in the credit markets. Oil prices, while slightly down after a six-day rally, were also chipping away at investor confidence.

On Friday, the Dow Jones industrial average dropped 366.94 points, or 2.64%, to 13,522.02. The broader S&P 500 index slid 39.45 points, or 2.56%, to 1,500.63. The tech-heavy Nasdaq index fell 74.15 points, or 2.65%, to 2,725.16, as a break below 2,750 triggered some technical selling.

On the New York Stock Exchange, 28 stocks dropped for every five that gained ground, while Nasdaq breadth was 25 to five negative. The pall over the markets was such that investors weren't able to muster much enthusiasm even for companies with blow-out profit reports, such as Google (GOOG) and McDonalds Corp. (MCD).

In lowering its profit forecast for 2007, Caterpillar shared some gloomy views on the economy, saying it saw the gains in the second quarter fading in the second half of this year and that many of the most important industries it serves, such as the housing, mining and commercial construction sectors, are now in recession. Including commercial construction in this group sent off alarms for some observers, since economists had seen that industry holding up well in spite of turbulence in the credit markets.

There's no reason to think the bull market that's been in place for the past five years can't keep going, "but when we look at what’s typical and the overview for the overall economy, it's pretty easy to think we’ve run a lot of our course here," said Barry Ritholtz, chief market strategist at Ritholtz Research and Analytics. If there is a recession -- he now sees a 65% chance of one within the next 18 to 24 months -- the market could correct 10%, 20%, or even as much as 30%, fairly typical for a correction during a recession.

All bets for avoiding a downturn are off now that it's clear that big companies such as 3M Co. (MMM) and Honeywell International (HON), which had been thought to be benefiting from the weak U.S. dollar, aren't such a safe haven after all, he said.

Financials remained in the spotlight Friday, with some European banks being downgraded by analysts and Citigroup (C) saying that it has secured funding for its program to unfreeze the market for structured investment vehicles (SIVs). A big factor in the negative sentiment that has crept back into the market this week, analysts say, is renewed fear that the credit problems continue to play out and are likely to curb economic growth going forward.

The widening of spreads on certain interest-rate swaps shows that the money markets are clearly bracing for another credit event, according to Action Economics, which notes persistent rumors of a couple of smaller SIV funds in jeopardy.

The credit situation -- along with the chronic weakness in the dollar -- is also likely to dominate the discussion at the G7 summit in Washington, D.C., this weekend.

Contributing to negative sentiment Friday were concerns that turmoil in the credit markets -- reflected by continued downgrades by Standard & Poor's in the subprime mortgage-backed securities markets and the specter of forced liquidations for some SIVs -- could once again lead to a seizing up in liquidity, said Derrick Wulf, a portfolio manager at Dwight Asset Management in Burlington, Vt.