Here we go again: Stocks slammed as U.S. ‘dangerously close’ to a recession

U.S. stocks extended losses, sending the Dow Jones Industrial Average down more than 400 points for the fourth time this month, amid concern that the global economy is slowing and speculation that European banks lack enough capital.

Caterpillar Inc. and FedEx Corp. dropped at least 4.2 percent, pacing losses in companies most-tied to economic growth, as jobless claims and consumer inflation rose, existing home sales fell and the Philadelphia-area manufacturing index slumped to the lowest level since 2009. Hewlett Packard Co. dropped 3.1 percent as it cut its full-year forecast and confirmed it was in talks to buy Autonomy Corp.

The Standard & Poor’s 500 Index slumped 5 percent to 1,133.94 at 3:01 p.m. in New York. All 10 groups in the S&P 500 dropped at least 2 percent, and only four stocks in the benchmark gauge advanced. The Dow fell 485.25 points, or 4.3 percent, to 10,924.96. Treasuries rallied, pushing 10-year yields to a record low. Gold soared to a record.

“It’s almost like a worldwide buyers strike,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “There’s a general malaise on global economic activity. People continue to downgrade their expectations on growth. There’s concern about funding problems. That’s making us very nervous and we want to take risk out of portfolios at least for the immediate future.”

S&P 500’s Decline

The S&P 500 has tumbled 16 percent from its April 29 high, matching the retreat between April 23 and July 2, 2010, previously the biggest contraction of the bull market that began in March 2009. More than $3.2 trillion was erased from U.S. equity values between April 29 and Aug. 8, leaving the S&P 500 within 29 points of entering a bear market. European shares and the Russell 2000 Index entered a bear market last week, falling at least 20 percent from their previous highs. “The massive exodus from risk markets reflects heightened concerns with a possible recession and the accelerated loss of trust in policymakers,” Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, wrote in an e-mail. “Importantly, such worries will now be compounded by concerns about technical damage to key markets. The risk is of a rapidly deteriorating negative feedback loop of weakening fundamentals, inadequate policies and bad technicals.”

‘Dangerously Close’

Global stocks tumbled today after Morgan Stanley cut its forecast for global growth this year, citing an “insufficient” policy response to Europe’s sovereign debt crisis, weakened confidence and the prospect of fiscal tightening. The bank estimates expansion of 3.9 percent, down from a previous forecast of 4.2 percent, according to a report dated today.

The U.S. and Europe are “dangerously close to recession,” Morgan Stanley analysts including Chetan Ahya said in the note. “Recent policy errors, especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”

Equities also slumped after government data showed that more Americans than forecast filed applications for unemployment benefits last week, while the cost of living climbed in July by the most in four months. Separately, the National Association of Realtors said that sales of U.S. previously owned homes unexpectedly dropped in July, reflecting an increase in contract cancellations due to strict lending rules and low appraisals.

Philadelphia Index

Another report showed that the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July. The August gauge exceeded the most pessimistic projection in a Bloomberg News survey in which the median estimate was 2. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware. The Morgan Stanley Cyclical Index of companies most-tied to economic growth slumped 6.8 percent as all of its 30 stocks retreated. The Dow Jones Transportation Average of 20 stocks, also considered a proxy for the economy, tumbled 6.4 percent. A gauge of homebuilders in S&P indexes declined 6.5 percent.

Caterpillar, the world’s largest construction and mining- equipment maker, slumped 5.2 percent to $83.12. FedEx, operator of the world’s biggest cargo airline, sank 6.3 percent to $74.15. PulteGroup Inc., the largest U.S. homebuilder by revenue, decreased 11 percent to $4.17.

Banks Slump

American banks tumbled, following losses in European financial shares. The KBW Bank Index of 24 stocks retreated 5.7 percent. Bank of America Corp., the largest U.S. lender by assets, sank 6.4 percent to $6.98. Citigroup Inc. sank 7.2 percent to $27.71.

Banks also slumped after the Wall Street Journal reported that American regulators are intensifying scrutiny of the U.S. arms of Europe’s largest banks amid concern about the region’s debt crisis, citing people familiar with the matter.

Gauges of energy and raw-material producers slid at least 5.7 percent. Oil, wheat and copper led declines in commodity markets on concern that slower economic growth will weaken demand for raw materials. Gold surged to a record as investors fled stocks for the perceived safety of the metal.

Alcoa Inc., the largest U.S. aluminum producer, decreased 6.2 percent to $11.51. Exxon Mobil Corp. fell 4.3 percent to $70.95.

Treasuries surged, pushing yields to record lows, as investors seek a refuge in the world’s safest securities on concern global growth is slowing and speculation inflation will remain subdued.

‘Certainty of a Recession’

“The bond market is indicating certainty of a recession,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in a telephone interview. “Uncertainty regarding recession risk puts S&P 500’s earnings estimates in peril of drastic cuts, repricing stock market valuations and expectations lower. I expect the flight-to- quality to persist for the next several weeks.”

Since the third quarter of last year, companies in the S&P 500 have earned $774.3 billion, according to data compiled by Bloomberg, pushing per-share profit to $91.44 as of yesterday from $74.97 on July 2, 2010.

Analysts have underestimated U.S. earnings for eight straight quarters, with S&P 500 companies beating forecasts by an average of 5.1 percent in the three months ended in June. At the start of the last recession, their projections for overall profit proved 8.2 percentage points too high in the third quarter of 2007, and 33.5 points too high in the fourth. That was the biggest miss ever, according to data compiled by Bloomberg.

Economic Stimulus

Most U.S. stocks declined yesterday, wiping out an earlier advance, amid speculation that the Fed may not consider another economic stimulus program to avert a recession. The S&P 500 rose as much as 28 percent after Fed Chairman Ben S. Bernanke foreshadowed on Aug. 27 of last year a second-round of so-called quantitative easing. The Fed finished its second round of asset purchases at the end of June.

Bernanke’s pledge last week to keep interest rates near zero percent until mid-2013 was “inappropriate policy at an inappropriate time,” Charles Plosser, president of the Fed Bank of Philadelphia, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Dallas President Richard Fisher said the central bank shouldn’t enact policy to protect stock investors. Both officials dissented from the Fed’s Aug. 9 statement.

‘It’s Ugly’

“It’s ugly out there,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “It’s a combination of concern of a potential recession and the lack of policy tools to fight it. Until people see a bottom, they are not going to buy stocks. There will be pressure on the equity market until we see a solid policy response.”

U.S. stocks may slip to new lows in the next few weeks, setting the stage for a rally of more than 20 percent in the S&P 500, Tom DeMark, the creator of indicators meant to identify turning points in markets, said in an Aug. 16 interview. The S&P 500, which closed at 1,193.89 yesterday, will probably drop below the 11-month low of 1,119.46 set on Aug. 8 before surging above 1,363.61, its peak on April 29, according to DeMark.

U.S. and European options gauges surged. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 36 percent to 42.96. The VStoxx Index, which measures the cost of protecting against declines in the Euro Stoxx 50 Index, snapped a five-day losing streak. It climbed 35 percent, the most since May 2010, to 47.17. Volatility gauges in Hong Kong, South Korea, Japan and India also rose.

HP Rallies

Hewlett-Packard dropped 3.1 percent to $30.41 after jumping as much as 8.3 percent. The world’s largest computer maker is in talks to buy Autonomy Corp. for about $10 billion and plans to spin off its personal-computer business, said people with direct knowledge of the matter.

Autonomy confirmed it is in talks with Hewlett-Packard in a statement. Hewlett-Packard may unveil the plans as early as today, said the people, who asked not to be identified before an announcement. Hewlett-Packard, based in Palo Alto, California, is scheduled to report quarterly earnings today after markets close.

–Bloomberg News–

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