Updated from 3:15 p.m. EDTAfter bearing numerous hits in the past few weeks, stocks on Wall Street took another drubbing as a matter of course Wednesday. Bearish economic data, slumping earnings from financial firms and new comments from Federal Reserve Chairman Ben Bernanke held the spotlight as traders steadily sold off, a trend reflected in the major indices. The Dow Jones Industrial Average dropped 733.08 points, or 7.9%, to 8577.91, and the S&P 500 sank 90.17 points, or 9%, to 907.84. The Nasdaq lost 150.68 points, or 8.5%, to 1628.33. Wednesday's losses marked the second-worst single-day point loss by the Dow in history. The selloff nearly erased an impressive rebound Monday, when the blue-chip index rose 11% to 8451 and sparked hope that last Friday's low may have marked a bottom in the stock market's recent precipitous declines. Bernanke addressed the financial crisis in a speech before the Economic Club of New York Wednesday afternoon. Bernanke said a "loss of confidence by investors and the public in the strength of key financial institutions and markets" lies at the heart of the problem and that's why the government acted preemptively.
On Tuesday, stocks finished with modest losses, as traders digested the Treasury Department's plan to take a $250 billion equity stake in U.S. banks. The government investment is part of the larger $700 billion Troubled Asset Relief Program to provide assistance to struggling financial firms. Ahead of Wednesday's trading, the Federal Reserve said that Pimco, a unit of Allianz ( AZ), would be the custodian of the government's Commercial Paper Funding Facility, which will buy three-month commercial paper to support money markets. Allianz dropped 16% to $9.80. Credit markets continued to loosen as central banks across the globe flooded the markets with liquidity. Three-month dollar Libor, a measure of the rate banks charge one another for large loans, declined 9 basis points to 4.55%, its third straight daily decline. The money markets will look a lot more reassuring when net issuance of commercial paper recovers without the aid of the Federal Reserve, said Brian Bethune, director of financial economics Global Insight Economics. He said that he'd like to see Libor spreads come down another 150 basis points to the 3% range. "It's moving in the right direction," he said. "I think it's only been in the past six weeks that the Fed and Treasury have really realized that this thing is a massive shock," said Bethune. "Once you get six months behind a crisis of this order of magnitude, you're in deep trouble," he said.
Bethune said that despite a lag in recognition of the severity of the crisis, central banks and government officials may be able to catch up quickly, and recent responses have given additional reason for hope. Nevertheless, it's hard to quantify the fallout from the credit crisis onto the broader economy, he said. "The size of the shocks it can throw out are very large, and it's not to be underestimated. ... Let's face it. We don't really know, and to try and calibrate this is really quite difficult."
As earnings season hit full swing, several financial firms released quarterly results, many of which illustrated the deleterious impact of the credit crisis. JPMorgan Chase reported third-quarter profit that slid 84% year over year but nonetheless topped analysts' estimates. The decline in earnings came as JPMorgan saw $3.6 billion in asset writedowns and $640 million in losses related to its purchase of Washington Mutual. JPMorgan shares slumped 5.5% to $38.49. Similarly, Wells Fargo ( WFC) said its earnings slid 25% year over year, but the bank beat analyst expectations. The stock dropped 0.5% to $33.35. State Street ( STT), on the other hand, reported an increase in third-quarter income. However, unrealized losses in its commercial paper and investment portfolios stoked investor concern. Shares sold down 17% to $46.83. Outside the financials, pharmaceutical concern Abbott Labs ( ABT) said its earnings rose 51% year over year and raised its full-year earnings forecast. Abbott dropped 1.6% to $53.88. Beverage firm Coca-Cola ( KO) said its profit increased 14% year over year and trumped the Street's expectations. Shares added 1.1% to $44.21. Delta Airlines ( DAL), meanwhile, swung to a third-quarter loss that the company attributed to rising fuel costs. The stock climbed 1.2% to $7.44. As for technology shares, chipmaker Intel ( INTC) announced a 12% increase in third-quarter profit, but said its future performance was unclear. Intel lost 5.9% to $14.99.
Looking at the day's economic data, reports indicated that consumers were tightening their belts. The Census Bureau reported that retail sales were 1.2% lower in September, worse than a 0.4% decline in August. Economists had anticipated a drop of 0.7%. The decline in retail sales was the largest the U.S. has seen in three years. Excluding autos, the number fell 0.6%, a narrower decline than the 0.9% drop in August.
Business inventories were up 0.3% in August, less than the 0.5% increase anticipated by analysts, according to a report by the Census Bureau. In July, inventories rose 1.1%. On the price side, the Bureau of Labor Statistics said that, as expected, its producer price index declined 0.4% in September, compared with a 0.9% decrease in August. However, the core reading, which subtracts food and energy, saw a 0.4% uptick, more than the 0.2% consensus estimate and up from 0.2% in August. The New York Fed's manufacturing index for October fell to a record low of -24.6, down from -7.4 in September and much lower than -10 in August. Separately, the Fed's so-called beige book of anecdotal economic observations said that economic activity has softened in all 12 of its districts and said there was widespread pessimism about the country's growth prospects, while inflation has moderated in September. Dan Seiver, professor of finance at San Diego State University, said it's likely that a recession started in December 2007, but the worst is yet to come. He predicted negative GDP growth for the third quarter and another sharp decline for the fourth quarter of this year. He said he'd be shocked if unemployment didn't reach 7%. "It wouldn't shock me if it got all the way to 8%."
"The consumer has been as leveraged as businesses, maybe not as leveraged as Lehman Brothers, but it has been leveraged," said Seiver. He said that the retail sales number is a warning of what's to come. "It's hard to see anything but a dismal Christmas," he said.
Seiver did find reason for optimism, however. He said the housing market may bottom next year, and that if the stock market did reach a bottom last week, it is forecasting an economic recovery about six months from now. "For long-term investors, the silver lining is you can pick up some cheap stocks," he said. In commodities, crude oil lost $4.09 to settle at $74.64 a barrel, as OPEC cut its demand forecast for global oil demand for 2008 and 2009. Gold shed 50 cents to finish at $839 an ounce. Prices of longer-dated U.S. Treasury securities were rising. The 10-year note was up 20/32 to yield 4%, and the 30-year was adding 16/32, yielding 4.25%. The dollar was rising vs. the euro and pound but weakening against the yen. Overseas, European markets such as the FTSE in London and the Dax in Frankfurt were losing ground. In Asian markets, Japan's Nikkei closed slightly higher, while Hong Kong's Hang Seng finished with losses.