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Dec 1, 2008

The Recession Is Made Official — and Stocks Take a Dive

The reality that the U.S. is indeed in recession and that the downturn may well be prolonged sent Wall Street plunging Monday, hurtling the Dow Jones industrials down nearly 700 points and wiping out more than half of last week's big gains. All the major indicators fell more than 7 percent, with the Standard & Poor's 500 index down nearly 9 percent.

The market spent the day absorbing a litany of bad news that convinced investors that the optimism that fed a 1,276-point gain over five sessions was premature. Stocks first slid on initial reports that the first weekend of the holiday shopping season, while better than some retailers and analysts feared, saw only modest gains. That had Wall Street worried that the rest of the season would be disastrous, a troubling possibility not only for retailers but for an economy that is dependent on consumer spending for its growth.

According to figures released by ShopperTrak RCT, a research firm that tracks total retail sales at more than 50,000 outlets, sales over Friday and Saturday rose just 1.9 percent.

Meanwhile, downbeat economic reports on the manufacturing sector and construction spending only added to investors' concerns. Speeches from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson also did little to assuage investors about the downturn.

The day's news reminded investors, who last week were buying on a burst of optimism, that the U.S. economy is still in serious trouble. Then, at midday, Wall Street got confirmation of what everyone has suspected for months, that the nation is indeed in a recession. The National Bureau of Economic Research, considered the arbiter of when the economy is in recession or expanding, said the U.S. recession had begun a year ago, in December 2007.

That assessment made the retail sales figures all the more unnerving.

"Unfortunately, two-thirds of the American economy is based on the spending of the American consumer," said Mike Stanfield, chief executive of VSR Financial Services. "When the consumer pulls back, it's very hard for the economy to gain much traction."

Investors had been hopeful that last week's rally — when the major indexes shot up by double digit percentages — was a sign that some stability had returned to a market badly shaken by months of discouraging economic data. But analysts expect economic concerns to weigh on the market for some time to come.

"Everyone knows the recession is on us, the question is now will it be short and shallow or long and severe," Stanfield said.

Chuck Widger, chief executive of investment management firm Brinker Capital, expects the volatility to continue until investors have better visibility on the future.

"Investors are looking for better data on the economy," he said. "We've got baked in pretty nasty assumptions for the economy this quarter. The markets are looking ahead to the first quarter for data that will confirm or deny the bad news."

The Dow Jones industrial average fell 679.95, or 7.70 percent, to 8,149.09. The Standard & Poor's 500 index dropped 80.03, or 8.93 percent, to 816.21, while the Nasdaq composite index fell 137.50, or 8.95 percent, to 1,398.07.

Only 218 stocks were in positive territory on the New York Stock Exchange with 2,693 declining. Volume came to 1.62 billion shares.

The Russell 2000 index of smaller companies fell 56.07, or 11.85 percent, to 417.07.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.76 percent from 2.92 percent Friday. The yield on the three-month T-bill, considered one of the safest investments and an indicator of investor sentiment, slipped to 0.02 percent from 0.05 percent Friday. The lower the yield, the more anxious investors tend to be.

The market received no relief after a pair of speeches from Paulson and Bernanke about the economy.

Paulson said the administration is looking for more ways to tap a $700 billion financial rescue program and will consult with Congress and the incoming Obama administration. The program has distributed $150 billion out of the $250 billion earmarked to buy stock in banks as a way to boost their resources so they can lend more.

He said the administration is looking at other ways to utilize the rescue package, including alternatives for providing capital to financial institutions.

Meanwhile, Bernanke said in another speech Monday that further interest rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive the economy. The central bank's key interest rate now stands at 1 percent, a level seen only once before in the last half-century.

On the day a recession was formally declared, investors cast their vote that economic recovery was nowhere in sight. All broad stock market indexes dropped sharply, with the steepest thrusts coming at the end of the trading day. The Dow ended Monday's session down 679.95 points or 7.7%, one of its worst days in recent months. Other broad market gauges took even steeper dives, with the Standard & Poor's 500, which includes financial stocks, falling 9.93%. The S&P 500 is now down 44% for 2008.

Financials were among the worst performing sectors of the day, with bank stocks dropping more than 17% on average. Shares of Citigroup, Merrill Lynch, Bank of America and Wachovia all fell more than 20%, largely erasing last week's financial-stock rally. Shares of oil companies fell sharply as well on Monday, as the price of crude sank to $49.28 per barrel, a decline of more than 9%. (See the Top 10 Wall Street Meltdowns)

Monday's market drop was accompanied by a mad rush to the safety of Treasury securities, where yields fell yet again. The yield on the 10-year note dropped to 2.748%. Ironically, many on Wall Street believe Treasury securities are no bargain, particularly after November's strong showing, when Treasuries delivered their best performance in more than 25 years. Merrill Lynch even issued a market report Monday morning noting that "Treasuries have moved into overvalued territory," yet added that it did not think the bull market in these securities would end anytime soon.

Moves across all markets on Monday traced back to the economic news, highlighting the belated announcement by the semi-official arbiter of recessions in the U.S. that the country is in fact in a recession. The only real news in the announcement from the Business Cycle Dating Committee of the National Bureau of Economic Research was the starting date that the seven economists on the panel assigned to the recession — last December.

There was also more timely evidence that the economy is in trouble. A much-watched real-time indicator of manufacturing activity, the Institute for Supply Management's monthly purchasing managers index, fell to a 26-year low. The JPMorgan global purchasing managers index, a measure that's only been around since 1998, hit an all-time low, with exporting nations such as China and Korea especially hard hit.

Meanwhile, a National Retail Federation survey showing a 7.2% increase in Thanksgiving-weekend retail spending vs. the year before failed to convince skeptics on Wall Street who still expect a dismal holiday shopping season overall. Even though Thanksgiving sales were stronger than many expected, the steep price markdowns did not augur well for retailer profitability.

But it's not just discrete events like economic releases weighing on the market. There's also the downward pressure — at times dull, at other times sharp — of institutional investors selling out of their stock positions. Part of October's swoon came from hedge funds raising cash to pay investors demanding their money back. While mutual fund redemptions have been a growing part of the story since then, we could still see more forced selling from hedgies.

In a Nov. 28 research note, analysts at Morgan Stanley pointed to growing redemptions from university endowments that have found their portfolio allocations out of whack, thanks to plunging stock prices — a point reinforced today when Paul Tudor Jones's Tudor Investment Corp announced that it had suspended redemptions on one of its hedge funds.

Source : IHT Time
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