Global General

Special

Newsmaker

Asia Pacific

America

Middle East

Europe

Africa

Wall Street drops to 5-year lows on economic fear

(Agencies)
Updated: 2008-10-28 08:25

NEW YORK – Stocks closed at their lowest levels in 5-1/2 years on Monday, extending a global sell-off as worry about the severity of a global recession and the bleak outlook for profits gripped investors.

Trading was volatile and volume was light, with stocks falling sharply in the last half hour of trading. With just four days left in October, the S&P 500 is on track for its worst month ever in the post-World War Two period.

Hedge funds and mutual funds have been dumping stocks to raise cash to meet redemptions from their clients, traders noted, exacerbating the late-day selling.

Shares of energy companies led the decline on bets that a deep global slowdown will sap demand for energy. ConocoPhillips shed 5.8 percent to $45.62 as U.S. crude oil futures slid 93 cents to settle at $63.22 a barrel on the New York Mercantile Exchange.

Technology shares also weighed on the broader market, with Microsoft a top drag on Nasdaq after the Wall Street Journal reported that defaults on tech financings -- loans that let companies buy computers, software and other products -- have spiked this year.

But the stress in global money markets showed some signs of abating. Overnight and three-month dollar-denominated London interbank offered rates eased slightly.

"It is so negative out there, you felt like a skater without any skates: It couldn't stay up," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital in Baltimore.

"People right now are expecting the worst -- a total collapse of the hedge fund industry with half of them (hedge funds) not existing any more. Moms and pops with 401(k)s are saying, 'I have had enough and don't want to be in there any more,'" Mata said.

The Dow Jones industrial average slid 203.18 points, or 2.42 percent, to 8,175.77, its lowest close since April 2003. The Standard & Poor's 500 Index dropped 27.85 points, or 3.18 percent, to 848.92, its lowest close since March 2003.

The Nasdaq Composite Index was down 46.13 points, or 2.97 percent, at 1,505.90, its lowest close since May 2003.

The U.S. market's declines followed steep drops in Asian stock markets. Hong Kong shares plunged 12.7 percent, and Japan's Nikkei average slid 6.4 percent to their lowest close in 26 years.

An index of the shares of regional U.S. banks rose 1.6 percent, after 16 U.S. banks, including BB&T Corp, accepted more than $33 billion of U.S. government cash. The infusions are part of the second phase of a $250 billion recapitalization program launched this month by U.S. Treasury Secretary Henry Paulson.

The broader S&P financials sub-index fell 4.1 percent, however, as speculation turned to which lenders might not qualify for help.

The global recession worry overshadowed hopes about the Federal Reserve's efforts to thaw the deep freeze in short-term lending markets. The Fed set the interest rates it will charge companies for the commercial paper it will buy from them in a debut program, the New York Fed said on Monday. The program aims to increase the supply of funds for many corporations that rely on selling commercial paper to raise short-term money for their daily operations.

"I think the market psychology still has a negative slant to it. There is no news to suggest that this downward spiral will end any time soon. The only time we get any kind of lift in equities is when the government comes out with a new plan," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

Phone company Verizon Communications' solid profit made it a bright spot for the Dow. Verizon's stock jumped 10.1 percent to $27.61.

Shares of General Motors slid 8.4 percent to $5.45 on the New York Stock Exchange as investors fretted about the carmaker's outlook after people familiar with the talks said that GM and Chrysler LLC's owners, Cerberus Capital Management, were discussing a merger.

The Dow Jones U.S. Home Construction Index fell 3.3 percent after data showed that while sales of newly constructed U.S. single-family homes rose in September and inventories shrank, but builders slashed prices to their lowest level in four years to move property as the financial crisis deepens.

The U.S. stock market was also looking ahead to the Federal Reserve's interest-rate decision later this week. The Fed is expected to cut lending rates at a two-day policy meeting in response to unprecedented turmoil in financial markets and the threat of a global recession.

The consensus is for a half-point cut in the overnight fed funds rate to 1 percent, which would be the lowest since June 2004. The central bank is also expected to signal a willingness to lower borrowing costs again if needed -- especially with inflation pressures fading fast.

Trading was low on the New York Stock Exchange, with about 1.34 billion shares changing hands, sharply below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.27 billion shares traded, above last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE and Nasdaq by a ratio of roughly 4 to 1.