Faced with ubiquitous signs of global economic meltdown, investors sold stocks in force on Tuesday, dragging the broad market indexes down near the lows reached last November. The Standard & Poor’s 500 index, weighed down by financials, fell 4.56%, while the Dow Industrials sank 3.8%, falling to within a fraction of its November 2008 low. Among the hardest hit sectors were bank stocks, down 10%, oil service stocks, down 8.2%, and semiconductor stocks, which fell 6.7%. Gold Mining was among the rare winners Tuesday, with the industry group rising 2.5%.
Dragging the stock market down is a near universal acceptance that this recession is going to be longer and deeper than the consensus thought just three months ago. Late last week, for example, investment firm Credit Suisse lowered the projected operating earnings for S&P 500 companies to $58. It had been expecting $70 per share. The firm now expects overall operating earnings for the S&P 500 to fall 34% in 2009. In lowering its estimate, Credit Suisse analysts added a note of caution to the grim forecast: “We worry that while financial earnings have already seen considerable weakness, non-financial earnings have further to fall.” Faced with such pessimism, the S&P finished Tuesday’s session at 789, below the 800 ‘technical support” level that analysts feel was critical to maintaining investor confidence.
Investor sentiment was shaken over the holiday weekend by news that Japan’s economy shrank at an annualized rate of almost 13% in the latest quarter. Economic news from virtually every corner of the world is reinforcing the notion that this economic storm knows no bounds, and may be gaining fury.
That perception is leading investors to take cover, even in the face of hopeful news. Indeed, as the market sank on Tuesday, President Obama not only signed the $787 billion stimulus into law, but added that there could be yet another stimulus package if needed. Moreover, recent reports from the credit markets indicate that the great credit freeze may finally be starting to thaw. Morgan Stanley says that its analysts are seeing an improved credit landscape in most of the industries they track. “With the exception of utilities, a clear majority of firms in every other sector reported that credit availability had either remained the same or become easier over the past three months,” Morgan Stanley’s February 17 report notes.
It is likely that investors will be reluctant to bet on nascent signs of improving credit so long as the housing market remains in turmoil. On Wednesday morning President Obama and Treasury Secretary Timothy Geithner will appear at a high school in Arizona to unveil their new plan to stem the tide of housing foreclosures. The financial community’s response to that plan will likely be writ large in the stock market averages by late morning.
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