Late Sell-Off Slams U.S. Stocks

Deepening concerns about a recession prompted an accelerated downturn in equities in the final hour of trading Monday

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A fairly slow trading session marked by seesawing stock moves turned into a sharp sell-off in the final minutes of trading on Monday, as fear about a deep recession dragged U.S. equity prices lower.

With October coming to a close, U.S. stocks had struggled to mount a rally as traders squared positions, hesitant to make a major buying commitment at a time of global recession and a spreading banking crisis. An encouraging 2.7% rise in September U.S. new home sales and news that 16 U.S. banks had accepted more than $33 billion in cash from the U.S. Treasury weren't enough to allay market worries. Traders were still looking for a bottom in the major indexes amid the heightened volatility.

Outside the U.S., equities were weakened by the continuing effects of a banking crisis that is contributing to a budding global recession likely to be one of the deepest and longest in decades, according to S&P MarketScope.. European equities were able to pare earlier losses, with London stocks off 0.79%, Frankfurt down up 0.91%, and Paris lower by 3.96%. Asian markets finished with steep losses: Tokyo stocks fell 6.36%, Hong Kong stocks plunged 12.70%, and Shanghai stocks dropped 6.32%.

S&P MarketScope notes reports of forced selling and liquidation of risky assets. The equity market presents "values galore, but no one is willing to buy yet."

Bonds were mostly higher before the start of the two-day FOMC meeting on Tuesday; Fed policymakers are expected to cut interest rates by another half-percentage point and the central bank will probably downgrade its outlook on the U.S. economy.

The dollar gained strength and gold was higher in volatile trading, while oil futures ended lower.

On Monday, the Dow Jones industrial average gave back midday gains to finish 203.18 points lower at 8,175.77. The broad S&P 500 index ended 27.85 lower at 848.92. And the tech-heavy Nasdaq composite index shed 46.13 points to close at 1,505.90.

Activity in the broader market was negative, with energy and utility stocks among the worst performers, depressed by the bleak economic outlook, which overshadowed gains by regional banks, S&P Marketscope said. On the New York Stock Exchange, 24 stocks were lower in price for every seven that advanced. The ratio on the Nasdaq was 22-7 negative.

Some market observers expressed concern that the government, by injecting cash into regional banks and encouraging even more remote financial institutions to line up for capital, are stretching the $250 billion allotment of the $700 billion financial rescue package dangerously thin.

The Treasury Dept.'s failure to distinguish between institutions that truly need the capital to survive and those that don't is delaying the entry of other investors like vulture capital firms to augment government capital, says Joe Battipaglia, market strategist at Stifel, Nicolaus & Co. in Philadelphia.

"It’s a confused message the market has received and that usually leads to inefficient application of capital," he says. "Since you’ve opened the flood gates and given others tacit agreement to stand in line like insurance companies and auto finance companies, all of sudden $250 billion doesn’t look like much."

And if Secretary Paulson and his crew decide to take more from the remaining $500 billion in the rescue package for direct cash infusions, there will be that much less available to buy toxic assets off bank balance sheets and help provide some semblance of price discovery for those assets, he adds.

That and ongoing vulnerability to further bad news, whether on the corporate earnings front or demands on government support from American International Group, which is quickly burning through the cash it's already gotten from the Treasury, will continue to put a damper on stocks, Battipaglia predicts. He also doesn't share the optimism about the market making a bottom any time soon, since major bottoms in the past have been accompanied lower price-to-earnings ratios and higher dividend yields than there are currently. He sees potential for another 10% to 20% downside risk, depending on how bad economic conditions get.