US market sees steepest dive since 2008 crisis

Gripped by fear of a new recession, the US stock market suffered its worst day since the financial crisis in the fall of 2008.

The Dow Jones industrial average fell more than 500 points, its ninth-steepest decline.

The sell-off wiped out the Dow’s gains for 2011. It put the Dow and broader stock indexes into what investors call a correction – down 10% from their highs in the spring.

Across the financial markets, the day was reminiscent of the wild swings that defined the financial crisis in September and October three years ago. Gold prices briefly hit a record high. Oil fell even more than stocks – 6%, or $5.30. And frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money.

It was the most alarming day yet in the almost uninterrupted selling that has swept Wall Street for two weeks. The Dow has lost more than 1,300 points, or 10.5%. By one broad measure kept by Dow Jones, almost $1.9 trillion in market value has disappeared.

For the day, the Dow closed down 512.76 points, at 11,383.68. It was the steepest point decline since December 1, 2008.

Yesterday’s decline was the ninth-worst by points for the Dow. In percentage terms, the decline of 4.3% does not rank among the worst. On Black Monday in 1987, for example, the Dow fell 22%.

Two weeks ago investors appeared worried about the deadlocked negotiations in Washington over raising the ceiling on government debt. As soon as the ceiling was raised, investors focused on the economy, and the selling accelerated.

Yesterday, growing fear about the weakening US economy was joined by concern in Europe that the troubled economies of Italy and Spain might need help from the EU.

A financial rescue package for Italy or Spain might be more than the group of countries can handle.

'A perfect storm'

Traders also unloaded stocks before today’s release of the government’s unemployment report for July, which is expected to show weak job growth and perhaps a rise in the unemployment rate, which is 9.2%.

Together, they produced “a perfect storm of selling”, said Ryan Larson, head of US equity trading for RBC Global Asset Management.

Until a week ago, Wall Street had mostly convinced itself that the US economy would improve in the second half of the year. Fuel prices were falling and Japanese factories were resuming production after disruptions from the March earthquake.

Then one report after another began to show that the economy was much weaker than first thought.

In an indication of how frightened investors are, Bank of New York Mellon said it would start charging large investors to hold their cash because they are depositing so much. The bank’s clients include pension funds and large investment houses that are selling stock and need to deposit the proceeds.

Other market indicators reinforced the risk-averse mood. Gold, which is seen as a safe investment when the stock market is turbulent, set a record price, 1,684.90 dollars an ounce, before falling to finish the day at $1,659. Adjusted for inflation, gold is still far below the record reached in 1980.

The yield on the 10-year US Treasury note fell to 2.42%, its lowest of the year, and the yield on the two-year Treasury note hit its lowest ever, 0.265%. Bond yields fall when demand for bonds increases.

The yield on the one-month Treasury bill fell to almost nothing – 0.008%. Investors were willing to accept paltry returns in exchange for holding investments they believed to be stable.

The sell-off was broad. All 10 industry groups in the Standard & Poor’s 500 index fell. Energy companies lost almost 7%, materials companies were down 6.6%, and industrial companies lost more than 5 %.

The sell-off now comes at a time when corporate profits are growing. For the S&P 500, a measure called the forward price-to-earnings ratio has fallen to about 12, well below its long-term average of 16. That means that investors who buy now are paying less for each dollar in profits.

Based on what an investor now pays for corporate profits, stocks are now trading at their lowest levels in 20 years, said Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City.

But few companies were spared in the sell-off Thursday. Just three of the 500 stocks in the S&P 500 moved higher. General Motors fell 4% despite beating analyst estimates for its quarterly earnings.