Stocks Crash, Dow Sinks 679

Investor panic reaches new heights as S&P 500 plunges 7.6% and Dow finishes below 9,000 for the first time in five years

by Will Andrews and Karyn McCormack

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U.S. stocks plunged in the final hour of trading, logging another devastating session with the Dow industrials plunging almost 679 points -- or 7.3% -- to below 9,000.

It doesn't seem to matter what the central banks and lawmakers do to stop the bleeding from the credit crisis. Fear has taken over Wall Street. "It's beyond a panic," says Dave Rovelli, managing director of equity trading at Canaccord Adams. "As soon as we start to rally, sellers come back into the marketplace."

Stocks started higher Thursday morning thanks to a strong earnings report from technology bellwether IBM Corp. (IBM). But news in the afternoon turned the market sour for the seventh session in a row.

Some market watchers think the selling accelerated in the last hour of trading Thursday after S&P Ratings Services placed both General Motors (GM) and Ford Motor (F) on CredtiWatch with negative implications. JD Power and Associates reported that market uncertainty has led to a downward revision of its 2009 U.S. light-vehicle forecast. (JD Power and Associates, Standard & Poor's and BusinessWeek are owned by McGraw-Hill (MHP).) Jeff Schuster, executive director of automotive forecasting for JP Power, said, "the global market in 2009 may experience an outright collapse." The shares of GM plunged 31% to 4.76 -- a level not seen in more than 50 years as concerns over raising capital and a global auto market collapse weigh heavily on investor sentiment. Ford shares tumbled 21% to 2.08.

Bank stocks stayed under pressure news that talks between Citigroup (C), Wells Fargo (WFC) and the U.S. government regarding the future of Wachovia(WB) have stalled. Some also say financials got hit because the short-selling ban was lifted.

Insurance stocks also suffered amid news from AIG (AIG), which said it entered into a securities lending agreement with the New York Federal Reserve Bank covering $37.2 billion of securities. With regard to the AIG news, S&P Equity Research said: "it is our understanding the Fed action was necessitated by a decline in the value of collateral backing of a securities lending transaction."

By the end of Thursday's session, the blue-chip Dow Jones industrial average tumbled 678.91 points, or 7.33%, to 8,579.19 -- the lowest level in five years. The broader S&P 500 index shed 75.02 points, or 7.62%, to 909.92. The tech-heavy Nasdaq composite index declined 95.21 points, or 5.47%, to 1,645.12.

Thursday's declines bring the Dow's loss for 2008 to 35.3% -- worse than 1937's decline of 32.8%. The S&P 500 is now down 38% -- also the worst drop since 1937, while the Nasdaq has also lost 38% this year. The markets still have a ways to go to beat the worst year of the Great Depression, 1931, when the Dow fell 52.7% and the S&P 500 plunged 47.1%.

The last time the S&P 500 dropped seven days in a row was June 1996. For the Dow, the last seven-day drop goes back to July 2002.

The volatility index (VIX), a measure of fear, moved above 60 for the first time ever on Thursday. The VIX jumped to a new high of 64.92 before settling with a gain of 11% to 63.92.

Treasuries fell sharply Thursday on the back of concern that supply will increase dramatically as the Treasury Dept. funds its efforts to stabilize the commercial paper market. The 10-year note sank 41/32 to 101-19/32 for a yield of 3.80%, while the 30-year bond dropped 49/32 to 106-15/32 for a yield of 4.12%.

Crude oil futures also dropped due to speculation that the global economy will slow due to the financial crisis, which would hurt demand for energy. November WTI crude oil futures were off $1.60 to $87.35 a barrel at 2:04 pm EDT.

What's behind this never-ending selloff in stocks? Investors are suffering from a lack of confidence that the financial rescue package will work and keep the economy from sliding into a deep recession. "The market needs to get a sense that this rescue package will start working," says Reena Aggarwal, professor at Georgetown University's McDonough School of Business. "Once there's the slightest sense that that is working, people will jump back in."