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Stocks Hit '97 Level, Signaling Long Slump

Stocks Hit '97 Level, Signaling Long Slump

 

By TOM LAURICELLA and ANNELENA LOBB

 

The Dow Jones Industrial Average tumbled below 7000 for the first time in 12 years as investors around the globe appeared to be giving up hope and girding for a prolonged recession.

 

Sam Stovall, chief investment strategist at Standard and Poor's, talks with Kelsey Hubbard about the historical context of this decline.

 

U.S. investors joined a world-wide selloff that began in Asia and rippled through industries from financials to consumer durables to technology. The Dow dropped 4.2% to 6763.29, its lowest close since April 1997. It has lost almost one-quarter of its value this year and more than half since its high in October 2007.

 

Hardest hit were shares of already-battered banks. Shares in HSBC Holdings PLC, Europe's largest bank, dropped nearly 19% after it announced plans to raise capital and pull out of a disastrous foray into U.S. consumer lending. Citigroup Inc. declined 20% and General Electric Co. slid 11%.

 

While there was plenty of fresh bad news to go round, traders said the latest downdraft broadly reflected a deepening sense of gloom among investors. Gone are the days where the mantra among investors was to "buy the dips," on the belief that when stock prices fall, they're likely to rebound. Instead, the opposite sentiment has taken hold.

 

"It's like an unending nightmare," says Kent Engelke, managing director at Capital Securities Management in Glen Allen, Va.

 

The latest readings on the U.S. economy offered little reason for hope. On Monday, the government said the personal savings rate jumped to 5% in January -- its highest level in nearly 14 years, and a shift from recent years when households were spending more than they earned. In the past, many have called upon Americans to save more, but right now, weakness in consumer spending is depressing manufacturing and construction. The Institute for Supply Management said Monday that its measure of manufacturers' employment plans fell to its lowest level since monthly records began in 1948.

 

In a separate report Monday, the government said spending on new construction tumbled in January. Of particular concern: a 4.3% annualized drop in private nonresidential spending, such as on hotels and lodging, the largest monthly decline in 15 years.

 

The economy, which shrank at a 6.2% annual rate in the fourth quarter, is likely to shrink at around a 5% pace in the current quarter, economists estimate. The Labor Department is expected to report on Friday that the unemployment rate -- 7.6% in January -- rose again in February.

 

As global markets tumbled, the U.S. dollar strengthened against a wide swath of currencies, sending an index that tracks the dollar versus six major currencies to a three-year high. Treasurys also climbed as investors sought lower-risk investments.

 

The Standard & Poor's 500 stock index came perilously close to closing below 700 for the first time since 1996. It ended the day at 700.82, down 4.7%. The technology-laden Nasdaq Composite Index declined 4%.

 

Monday's selloff may have been triggered in part by investor Warren Buffett, who told investors in his quarterly letter that the economy would remain "in shambles for 2009." In addition, there was news of another injection of taxpayer money into insurer American International Group Inc. -- a stark reminder of the depth of the financial sector's problems.

 

The relentless decline is pushing investors to the sidelines. The Dow, down 10 of the past 12 trading days, has fallen 7,401.24 points from its peak of 14164.53 in October 2007.

 

Robert Pavlik, chief market strategist at Banyan Partners LLC in New York, says he hears more exhaustion than panic from clients. "People are dejected and concerned," he says. The feeling is, "Why should I step out in front of a train?"

 

Bijon Mishra, 60 years old, a financial-services consultant in New York, has 80% of his main retirement account in U.S. Treasurys and bond funds, 5% in cash, and just 15% in stock funds. He had been thinking that with stocks down so much, he would begin shifting back into the market. But now he's changed his mind. "I want to wait for a firm turnaround, and be as safe as possible," he says.

 

Investors fled U.S. stock mutual funds during the first three weeks of February, according to estimates from the Investment Company Institute. That's after withdrawing a record $234 billion last year.

 

The market has yet to show signs of reaching a bottom. There has been no panic selling in large volume, which is typically the hallmark of a market nadir, a phenomenon known as "capitulation," traders say. Many analysts and investors are still worried that earnings estimates are too high and that the value of many stocks may still be inflated. That's even after huge declines that have reduced companies' share prices relative to earnings, known as a price-to-earnings ratio.

 

General Electric, which slashed its dividend Friday, was one of the hardest hit stocks on Monday, falling 11% to $7.60, its lowest close since 1993. Investors, in effect, are saying that GE's profits will be tepid for years to come.

 

"Nobody wants to buy a market today that they think is going to be down 2 or 3% tomorrow," says Michael O'Rourke, chief market strategist at brokerage firm BTIG LLC.

 

The dour outlook is rooted in the fundamental challenges facing the global economy. Investors appear to have given up hope for quick fixes. Instead, many now believe that even with aggressive efforts by U.S. and other governments to shore up the financial markets and economy, the problems are so deep that it is likely to be months before there are concrete signs of their effectiveness.

 

Until the decline in housing prices shows meaningful signs of ending, market-watchers say, it will be difficult for stock prices to stage any kind of lasting recovery. Problems in the financial system also are impeding a stock-market recovery. The messes that big banks and other financial institutions have gotten themselves into are so complex that untangling them will likely take many months.

 

Jeffrey Saut, chief investment strategist at Raymond James & Associates, says investors are skeptical of anything that even hints of optimism. Mr. Saut, who turned negative on stocks in late 2007, began telling clients late last year to slowly get back into the market. Their response, he says, has been to send him hate mail.

 

"All investors are focused on is that they've lost a lot of money," he says

—Peter McKay and Kelly Evans contributed to this article.

 

Write to Tom Lauricella at tom.lauricella@wsj.com and Annelena Lobb at annelena.lobb@wsj.com

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Uploaded on March 3, 2009