Wall St plummets as China takes big hit

The Dow began the day falling sharply, and the decline accelerated throughout the course of the session before stocks took a huge plunge in late afternoon as computer-driven sell programs kicked in.

The Dow fell 546.02, or 4.3%, to 12,086.06 before recovering some ground in the last hour of trading to close down 415.86, or 3.29%, at 12,216.40. Because the worst of the plunge took place after 2.30pm, the New York Stock Exchange’s trading limits, designed to halt such precipitous moves, were not activated.

The decline was the Dow’s worst since September 17, 2001, the first trading day after the terror attacks, when the blue chips closed down 684.81, or 7.13%.

The drop hit every sector of stocks across the market. Riskier issues such as small-cap and technology stocks suffered the biggest declines.

Investors’ dwindling confidence was knocked down further by data showing that the economy may be decelerating more than anticipated. A Commerce Department report that orders for durable goods in January dropped by the largest amount in three months exacerbated jitters about the direction of the US economy, just a day after former Federal Reserve Chairman Alan Greenspan said the US may be headed for a recession.

“It looks more and more like the economy is a slow growth economy,” said Michael Strauss, chief economist at Commonfund. “Moderate economic growth is good – an abrupt stop in economic growth scares people.”

The market had been expecting the government on Wednesday to revise its estimate of fourth-quarter GDP growth down to an annual rate of about 2.3% from an initial forecast of 3.5%, and grew increasingly nervous on Tuesday that the figure could come in even lower.

The housing market, which the Street had been hoping had bottomed out, also looked far from recovery after a Standard & Poor’s index indicated that single-family home prices across the nation were flat in December. A later report from the National Association of Realtors said existing home sales climbed in January by the largest amount in two years, but the data didn’t erase housing-related concerns, as median home prices fell for a sixth straight month.

But a growing feeling that Wall Street, which has had a big run-up since October, was due for a correction also played into today’s decline.

“I think that the market was prepared to pull back. The constellation of issues that were worrying the market came to a head,” said Quincy Krosby, chief investment strategist at The Hartford.

Just a week ago, the Dow had reached new closing and trading highs, rising as high as 12,795.92.

The broader Standard & Poor’s 500 index was down 50.18, or 3.46%, at 1,399.19, and the tech-dominated Nasdaq composite index was off 96.65, or 3.86%, at 2,407.87.

A suicide bomber attack on the main US military base in Afghanistan where Vice President Dick Cheney was visiting also rattled the market.

China’s stock market plummeted today from record highs as investors took profits when concerns arose that the Chinese government may try to temper its ballooning economy by raising interest rates again or reducing more of the money available for lending.

“Corrections usually happen because of a catalyst, and this may be it,” said Ed Peters, chief investment officer at PanAgora Asset Management. “The move in China was a surprise, and when a major market has a shock it ripples through the rest of the market. With all the trade that goes on with China, there tends to be a knee-jerk reaction with that kind of drop.”

The Shanghai Composite Index tumbled 8.8% to close at 2,771.79, its biggest decline since it fell 8.9% on February 18, 1997. Since Chinese share prices doubled last year as investors poured money into the market after the completion of shareholding reforms, trading in Shanghai has been very volatile.

Hong Kong’s benchmark Hang Seng Index dropped 1.8%, and Malaysia’s Kuala Lumpur Composite Index fell 2.8 percent. Japan’s Nikkei stock average fell a more moderate 0.52%, but European markets were rattled – Britain’s FTSE 100 lost 2.31%, Germany’s DAX index dropped 2.96%, and France’s CAC-40 fell 3.02%.

Bond prices shot higher as investors bought into the safe-haven Treasury market, pushing the yield on the benchmark 10-year Treasury note down to 4.47%, its lowest level so far this year, from 4.63% late on Monday. The bond buying was sparked primarily by the durable goods orders, which the Commerce Department said fell 7.8%, much more than what the market expected.

The durable goods drop raised the chance of the Federal Reserve easing interest rates later in the year – a possibility that makes the bond market an attractive place to be right now.

The hope for slowing inflation could be dashed, though, if energy costs keep rising. Oil prices initially fell today on worries that Chinese demand could be dampened should its economy slow down, but later rose on escalating tensions in the Middle East. Light, sweet crude for April delivery fell 62 cents a barrel to 60.77 on the New York Mercantile Exchange.

The dollar slipped against other major currencies, while gold also fell.

The Dow has been climbing at a steady rate since last summer, but over the past few trading sessions, stocks have pulled back on the worry that the market is due for a correction. Many analysts have noted that the Dow hasn’t seen a 2% decline in more than 120 sessions.

Data indicating a slower economy had recently been giving stocks a boost on the hopes that the Fed will lower interest rates, which could reinvigorate consumer spending and the struggling housing market. But the market may fall further before that happens, analysts said.

“If in a week or two, the psychology in the US market turns to the realisation that we’re in a modest growth economy of 2 to 3% growth, that will help temper inflation pressures going forward. If that perception evolves, there’s an increase in the likelihood that the Fed will be lowering rates rather than raising rates. Structurally, it’s a development that should be good for the equity market, but it might be an event that unfolds after prices are lower,” Strauss said.

Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 2.38 billion shares.

The Russell 2000 index of smaller companies dropped 30.96, or 3.76%, at 792.74.