Bloomberg News

Dow Falls Most Since October 2008 on Economic Growth Concerns

September 24, 2011

Sept. 24 (Bloomberg) -- U.S. stocks fell this week, sending the Dow Jones Industrial Average to the biggest loss since 2008, as the Federal Reserve said risks to the economy have increased and concern grew that policy makers will fail to spur growth.

Equities rebounded yesterday, following a four-day rout that erased $1.1 trillion in value, amid speculation governments will act to prevent a financial crisis. For the week, Alcoa Inc. and DuPont Co. tumbled more than 14 percent to lead losses in the Dow. Materials companies in the Standard & Poor’s 500 Index slipped 12 percent for the biggest drop among 10 industries as every group declined at least 1.6 percent. Bank of America Corp. slumped 13 percent, while FedEx Corp. tumbled 12 percent.

The S&P 500 dropped 6.5 percent to 1,136.43 this week, the most since the period that ended Aug. 5. The index retreated after posting the third-biggest weekly gain since 2009. The Dow dropped 737.61 points, or 6.4 percent, to 10,771.48.

“The likelihood of a recession in the U.S. has clearly risen this week,” Andrew Slimmon, the Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney LLC, which has about $1.7 trillion in client assets, said in a telephone interview. “Although the economic data is still inconclusive, the U.S. equity market is focused on the impact of a global slowdown and we remain cautious.”

Stocks fell after the Federal Reserve said there are “significant downside risks” to the economy and investors speculated central banks are running out of tools to prevent a recession. The MSCI All-Country World Index of shares in 45 nations extended its slump since May 2 to more than 20 percent this week, meeting the definition of a bear market. Benchmark measures for 32 out of 45 nations in the index have also reached that threshold. The S&P 500 must fall 4 percent to get there.

Treasuries Shift

The S&P 500 fell 2.9 percent on Sept. 21 and 3.2 percent the next day after the Fed said it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth.

“Confidence disappeared from the market this week after the Fed’s statement,” Alex Tedder, who helps manage about $12 billion in global stocks at American Century Investments in New York, said in a telephone interview. “People are realizing that there are not a lot of options left.”

Stocks rose yesterday as Europe governments speed up the creation of a permanent rescue fund, an internal working paper showed. The European Central Bank may step up efforts to ease financial-market tensions, including offering banks 12-month loans, Governing Council members said. About $3.5 trillion was erased from global equity values this week before yesterday.

Another Crisis

The world is poised for another financial crisis, with sovereign debt its epicenter, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which runs the biggest bond fund. The European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s debt crisis, El-Erian, who is also Pimco’s co-chief investment officer, said on Sept. 22 at an event in Washington.

Markets are telling policy makers that “they’ve got to change and act or we’re going to go into a double-dip recession, and we’re going to go down another 20 percent,” founder of Traxis Partners LLC Barton Biggs said in a Sept. 22 interview on Bloomberg Television’s “Street Smart” with Matt Miller and Carol Massar.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 11 percent as all 30 of its stocks retreated. The Dow Jones Transportation Average, also considered a proxy for the economy, slumped 9.6 percent. Both gauges fell the most since March 2009.

Alcoa, DuPont

Alcoa, the largest U.S. aluminum producer, dropped 16 percent to $10.07. DuPont, the biggest U.S. chemicals maker, slipped 14 percent to $40.46.

Coal companies tumbled, prompting losses in railroad stocks. Walter Energy Inc. reduced its second-half sales forecast, citing delays at mines in British Columbia and Alberta. Alpha Natural Resources Inc. pared its outlook for full-year production because of a drop in Asia demand and lower- than-expected output at some mines.

Walter Energy slumped 22 percent to $64.50. It closed at $64.10 on Sept. 22, the lowest since July 2010. Alpha decreased 32 percent, the most in the S&P 500, to $20.39. CSX Corp., the biggest eastern U.S. railroad, slumped 10 percent to $19.25.

The KBW Bank Index lost 9.5 percent. Bank of America and Wells Fargo & Co. had their long-term credit ratings downgraded by Moody’s Investors Service, which cited a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup Inc.’s short-term credit rating was cut.

Wells Fargo, Citigroup

Bank of America fell 13 percent to $6.31. Wells Fargo lost 5.1 percent to $23.69. Citigroup slipped 14 percent to $24.98.

FedEx tumbled 12 percent, the most since March 2009, to $67.30. The world’s biggest cargo airline cut its full-year profit forecast amid declining demand in the U.S. and Asia.

FedEx, an economic bellwether that delivers goods ranging from mobile devices to financial documents, saw U.S. shipments fall for the second quarter in a row as the economy grew at a lower rate than it estimated. Demand dropped for Asian technology products, especially from China, hurting the express international division.

Hewlett-Packard Co. slumped 5.1 percent to $22.32, the lowest price since May 2005. The company replaced Chief Executive Officer Leo Apotheker with Meg Whitman, asking the former head of an e-commerce company to turn around a computer maker plagued by slowing growth and management missteps.

Goodrich Corp. surged 31 percent to $121.75 for the biggest gain in the S&P 500. United Technologies Corp. agreed to buy the company for $16.5 billion, adding a maker of aircraft landing gear and jet-turbine casings to take advantage of a record surge in commercial plane orders.

Jet Engines

United Technologies, the maker of Pratt & Whitney jet engines, fell 8.7 percent to $68.92.

A pledge by Group of 20 nations to tackle rising risks failed to ease investor concern the global economy is on the brink of another recession as stocks continued their worldwide slide. Benchmark indexes for the U.S., U.K., Canada, Singapore and New Zealand are the only ones among 24 developed countries that haven’t fallen at least 20 percent from their highs, entering a bear market.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a Sept. 22 statement.

“This market is like a touchy herd of wild beasts,” Mike Shea, a managing partner at Direct Access Partners LLC in New York, said in an e-mail. “In a news driven market, or in this case, a comment-driven market, any one little thing could set off a stampede.”

--With assistance from Rita Nazareth, Carol Massar and Matthew Miller in New York. Editors: Nick Baker, Jeff Sutherland

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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