Worst stock market plunge since 2008
The yield on the one-month Treasury bill fell to almost nothing — 0.008 percent. Investors were willing to accept paltry returns in exchange for holding investments they believed to be stable.
The sell-off was broad. All 10 industry groups in the Standard & Poor's 500 index fell. Energy companies lost almost 7 percent, materials companies were down 6.6 percent, and industrial companies lost more than 5 percent.
For a time, Kraft Foods was the only stock to rise among the 30 that make up the Dow industrials. Kraft announced Thursday that it would split in two, with one company focusing on snacks and the other groceries. But the selling eventually dragged Kraft under, too, and its stock finished down 52 cents, at $33.78.
Steep stock market losses like the ones of the past two weeks can be self-reinforcing. A drop in stocks erodes household wealth and raises doubts about the economic outlook.
The result can be what economists call a vicious cycle. Stock losses take a toll on consumer confidence and make people more reluctant to spend money. Consumer spending makes up 70 percent of economic output in the United States.
Kevin Cook, senior stock strategist for Zacks Investment Research in Chicago, said investors' worst fears probably won't come true.
"This is not 2008 again," he said. "We don't have a liquidity crisis, we don't have a credit crisis — this is just profit taking."
Cook said he believes the S&P 500, which closed Thursday at 1,200.07, will trade between 1,150 and 1,250 between now and Oct. 1, at least until investors have enough information to determine whether the economy is in recession again.
Even taking into account the recent declines, stocks are still considered to be in an impressive bull market that began March 9, 2009, when the market reached its recession low.
The Dow closed that day at 6,547. Since then, it is up about 74 percent.
One year ago, the Dow closed at 10,680. About a month later, the stock market began a rally that took the Dow almost to 13,000. The catalyst was an announcement by Federal Reserve Chairman Ben Bernanke that the Fed was preparing to launch a program to buy $600 billion in government bonds to keep interest rates low and help stocks rally.
The sell-off now comes at a time when corporate profits are growing. For the S&P 500, a measure called the forward price-to-earnings ratio has fallen to about 12, well below its long-term average of 16. That means that investors who buy now are paying less for each dollar in profits.
Based on what an investor now pays for corporate profits, stocks are now trading at their lowest levels in 20 years, said Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City.
But few companies were spared in the sell-off Thursday. Just three of the 500 stocks in the S&P 500 moved higher. General Motors fell 4 percent despite beating analyst estimates for its quarterly earnings.
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