Markets plunge on economic turmoil; fears of another recession

View Photo Gallery —  A look at the drama on Wall Street.


By Sarah Halzack, Michael Fletcher and Cezary Podkul, Updated: Thursday, August 4, 4:02 PM

Fears of worsening economic turmoil in the United States and Europe triggered a broad-based retreat on global markets Thursday, with stock market indexes plunging more than 4 percent in New York.

The Dow Jones industrial average closed down for its ninth session out of 10, finishing the day down more than 500 points, or 4.3 percent in the red; the Standard & Poor’s 500 fell 4.8 percent; and the Nasdaq tumbled 5.1 percent. All three indexes experienced their biggest weekly drops since May 2010.

The Dow was down 10 percent from highs in May, erasing all gains for 2011.

“The undertone of this is just fear that we’re rolling off again into another recession,” said Jim Paulsen, chief investment strategist at Wells Capital Management.

The losses come after nearly two weeks of declines as evidence mounts that Europe’s debt crisis is intensifying and the U.S. economy shows no signs of rebounding soon.

The steep stock market drop that accelerated Thursday is stoking fears that the economy is headed into a sustained downturn at a time when policymakers are particularly ill-equipped to fight it.

The losses, if sustained, would severely undermine the efforts of both government and individuals to dig out of the severe debt that many analysts say is at the root of the nation’s economic troubles.

The Federal Reserve already has in place policies that have kept interest rates at near-record low levels, raising doubts about what more it can do. Meanwhile, the federal government has not shown the political capacity to enact new stimulus efforts.

“If we tie the hands of fiscal policy, and monetary policy has no new weapons and households are still cutting back . . . that is what the financial markets are reflecting now,” said Dan Seiver, a finance professor at San Diego State University.

If the market losses continue, it would complicate efforts to fix the nation’s ailing housing market and it would make it more difficult for hard-pressed state and local governments to balance their books. Already, both of those sectors have been cited as drags on the nation’s overall economic growth.

“If this economy were a bicycle, it would be about to topple over,” said Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities and formerly the top economic advisor to Vice President Biden. “We need to put pressure on those pedals, but the political system is pushing us in the other direction. The economy is crying out for help and the political system is deaf to those cries.”

On Thursday, there was profound worry among investors in other markets. Oil futures fell more than 5 percent in trading on the New York Mercantile Exchange to around $86. Gold futures retreated .4 percent from yesterday’s high of $1,663.30 per ounce to $1,656.60.

Meanwhile, yield on the 10-year Treasury note hit another low for the year, 2.42 percent, indicating that investors were still flocking to the safety of government debt. A lower yield indicates investors are willing to accept a smaller return in exchange for the safety of holding government debt.

Global markets also saw declines, with major sell-offs in Britain, Germany, Italy and Spain.

Concerns heightened in Europe that E.U. leaders might have to provide financial aid to large economies such as Italy and Spain — a far greater challenge than the help it recently provided to Greece. Leaders of the European Central Bank today decided to keep interest rates unchanged at 1.5 percent.

In the United States, a steady stream of bad economic news has been depressing stocks. Economic growth is nearly at a standstill, consumers are saving rather than opening their wallets, and manufacturing, after picking up, has stalled again.

Investors largely shrugged off a Labor Department report Thursday morning that showed a slight decline in weekly jobless claims. Applications for unemployment benefits dropped to 400,000 from 401,000 the week before.

This report precedes a highly anticipated monthly jobs report Friday, which analysts expect will show that the unemployment rate held steady at 9.2 percent.

Thursday’s losses follow a volatile day of trading Wednesday in which the Dow closed up 60 points after falling nearly 200 points earlier in the day.


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