US stocks plunge
Wall Street sank further today, extending its heavy losses as enthusiasm over Federal Reserve efforts to inject confidence into credit markets gave way to concerns about financial companies’ balance sheets.
The Dow Jones industrial average lost more than 400 points at one stage and all the major indexes fell well over 3%.
Federal Reserve Chairman Ben Bernanke warned in a speech today that the financial crisis could prolong the difficulty the economy is facing.
Some traders appeared to regard his remarks as a sign that an interest rate cut could be in the offing, but that did not staunch the losses that built on Monday’s huge drop.
Investors appeared initially heartened but still very cautious following the Fed’s announcement that it planned to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans.
The evaporation of faith that loans will be repaid has lenders weary and is making it more difficult and expensive for businesses and consumers to borrow.
Credit markets showed some signs of easing as demand for safe-haven investments decreased. Credit markets seized up last month after Lehman Brothers declared itself bankrupt and the government stepped in to rescue insurer American International Group (AIG).
The Fed’s latest move is designed to lubricate the lurching credit markets whose troubles have spread to other parts of the economy.
But the measure stops short of a broad interest rate reduction that some investors say is necessary to restore confidence in the market. Other market watchers argue, however, that more focused steps like a Fed decision to buy commercial paper are what is needed.
But some investors remain worried about financial companies like Bank of America, which after the closing bell on Monday slashed its dividend and reported that its third-quarter profit fell 68%. The stock fell 6.18, or 19%, to 26.04 and was the steepest decliner among the 30 stocks that comprise the Dow industrials.
And a rumour that Mitsubishi UFJ Financial Group was pulling out of a deal to acquire up to 24.9% of the voting shares of Morgan Stanley sent the investment bank’s stock tumbling 5.40, or about 23%, to 18.10.
Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.
“I think we have weeks of volatility ahead of us,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group.
She said the write-downs of bad debt at Bank of America were a reminder to investors that troubles within the financial sector remained.
The concerns weighed on stocks after Monday’s rout.
In late trading today, the Dow fell 348.86, or 3.50%, to 9,606.64, after dropping just over 400 points.
The plunge came a day after the blue chips fell below 10,000 for the first time in four years.
The Dow skidded as much as 800 points on Monday before finishing with a loss of 370.
Broader indexes also fell. The Standard & Poor’s 500 index declined 41.52, or 3.93%, to 1,015.37, while the Nasdaq composite index fell 74.91, or 4.02%, to 1,788.05.
