Doubts About Stimulus Drag Stocks Down Sharply

By THE ASSOCIATED PRESS
Published: February 17, 2009
Filed at 7:34 p.m. ET
NEW YORK (AP) -- Doubts that the government's stimulus and bank bailout programs can stop the global economic freefall dragged Wall Street to within a fraction of a point of its lowest close in 5 1/2 years Tuesday.
As President Barack Obama signed the $787 billion stimulus bill and automakers scrambled to come up with restructuring plans, investors waited anxiously for more specifics about efforts to rescue the economy.
''The government has their hand on the tiller. They're steering. And that's the problem. The markets are not confident the proper course has been set yet,'' said Henry Herrmann, chief executive officer at investment management firm Waddell & Reed.
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said Tuesday's drop represented ''a crescendo, if you will, of uncertainty. We're still in that period where more information needs to come out.''
The Dow Jones industrial average closed down 297.81 points, or 3.79 percent, at 7,552.60 -- just 31-hundredths of a point above its post-meltdown Nov. 20 close of 7,552.29, which was its lowest close since March 12, 2003. The Standard & Poor's 500 index fell 37.67, or 4.56 percent, to 789.17.
Worries about ailing banks, struggling automakers, tumbling home prices and cash-strapped consumers are threatening to push U.S. stocks back to levels not seen since the late 1990s.
Tuesday's trading session followed sharp pullbacks on overseas exchanges as investors around the world considered the likelihood of a delayed recovery. And over the weekend, a meeting of Group of Seven finance ministers failed to produce any specific steps to revive the global financial system.
''We don't think the recession's over until at least the middle of the year, and that's even starting to seem very early,'' said JPMorgan equities analyst Thomas J. Lee, adding that the market's worries are ''nothing new -- the magnitudes are worse.''
Obama is scheduled to discuss a program Wednesday on preventing foreclosures, but investors are especially anxious for details from the Treasury Department about its new rescue plan for the troubled banking sector.
The stock market is usually regarded as a forward-looking mechanism, but Lee pointed out that about one-third of the time, the S&P recovered around the same time as the economy.
''I'm tilting toward thinking we're going to have lows in mid-July,'' Lee said.
Investors are questioning whether the major indexes will breach their lows of last November, when investor fears ran high.
During that period, the Dow came within 102 points of the five-year trading low of 7,449.37, and the S&P came with 48 points of its 11-year low of 741.02.
On Tuesday, the Nasdaq composite index fell 63.70, or 4.15 percent, to close at 1,470.66. The Russell 2000 index of smaller company stocks fell 19.46, or 4.34 percent, to 428.90.
Only 219 stocks rose on the New York Stock Exchange, while 2,898 fell. Volume came to 1.61 billion shares. Investors fled from stocks and flocked instead to Treasurys, sending government debt yields lower.
The retreat in U.S. stocks occurred alongside a pullback in markets overseas. In Asia, Japan's Nikkei stock average fell 1.4 percent, and Hong Kong's Hang Seng index fell 3.79 percent.
In Europe, Britain's FTSE 100 fell 2.43 percent; Germany's DAX index fell 3.44 percent; and France's CAC-40 fell 2.94 percent. In Latin America, Brazil's Ibovespa index plunged 4.8 percent, and Mexico's IPC index fell 3.4 percent.
One big worry on Wall Street in particular is that General Motors Corp. and Chrysler LLC might not be able to repay billions of dollars in loans and return to profitability.
GM has already received $9.4 billion from the government and could get another $4 billion if the Treasury Department signs off on its viability plan. Chrysler, which has already borrowed $4 billion, said Tuesday in its restructuring plan that it wants another $5 billion -- $2 billion more than its initial request of $3 billion in additional financing.
GM shares dropped 32 cents, or 12.8 percent, to $2.18. Chrysler's shares are not publicly traded. The White House said Tuesday it has not closed the door to a government-backed automaker bankruptcy.
The biggest fear in the market is not that the stocks of banks and automakers will get wiped out. If all the Dow companies involved in financial services or automaking -- American Express Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., General Electric Co. and General Motors Corp. -- saw their shares sink to zero right now, the Dow would only lose about 400 points, or 5 percent.
Rather, the concern is that these ailing industries will keep hobbling the broader financial system and the economy. On Tuesday, Wall Street got another dose of grim economic news -- the New York Federal Reserve said its regional index of manufacturing activity is showing the sharpest contraction in February since it started the gauge in 2001.
Not even slightly better-than-expected fiscal fourth-quarter results from the world's largest retailer, Wal-Mart Stores Inc., could help buoy stocks. The market recently has shrugged off bits of stronger-than-anticipated corporate data as anomalies rather than harbingers of improvement. There is a ''tendency to dismiss them as, at the moment, not relevant,'' Herrmann said.
Wal-Mart reported operating earnings of $1.03 per share for the quarter ended Jan. 31, compared with analysts' expectations for earnings of 99 cents per share, according to Thomson Reuters. But the company also said first-quarter earnings could miss Wall Street expectations.
Wal-Mart was only company among the 30 Dow components to rise Tuesday. Its shares rose $1.71, or 3.68 percent, to $48.24.
Bank stocks were the biggest losers of the day, but nearly all sectors performed badly on Tuesday -- including technology, energy and airlines.
Insurance companies were hit hard, too. Allstate Corp. fell $2.09, or 9.8 percent, to $19.14, and MetLife Inc. fell $2.71, or 10 percent, to $24.09.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.65 percent from 2.90 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, rose marginally to 0.29 percent from 0.28 percent late Friday. U.S. markets were closed on Monday.
The dollar rose against other major currencies. Gold prices also rose.
Oil prices fell $2.58 to $34.93 per barrel on the New York Mercantile Exchange.