Dow careens another 307 points
The financial pain that was first felt by homeowners who couldn't make their mortgage payments, and later spread to banks burned by bad home loans, has now engulfed stock investors.
It's not just stocks tied to the real estate bust, such as banks and home builders, that are going down. Virtually all stocks are suffering big declines.
The Dow Jones industrial average fell 307 points, or 2.5 percent, Thursday and is down more than 1,100 points since the start of the year.
"People are scared," says Charles Biderman, CEO of TrimTabs Investment Research, which tracks investment fund flows. "They are taking their money out of stocks and running to the safety of cash."
In the first nine trading days of the year, investors yanked $16.3 billion out of domestic mutual funds and ETFs. That exceeds the combined monthly outflows of the past two years, Biderman says.
But investors are still staring at huge losses. In 2008, $1.8 trillion of stock market value has been wiped out, says Dow Jones Indexes.
The Russell 2000, a small-company stock index, is down 20.5 percent from its high, putting it in bear market territory, defined as a drop of 20 percent or more. Double-digit losses are now a reality for every major U.S. stock index. The Standard & Poor's 500, which lost half of its value in the 2000-2002 bear, is almost 15 percent off its most recent high.
The sell-off is fueling a debate over the odds of a bear. Bernie Schaeffer, president of Schaeffer's Investment Research, says there is "better than a 50-50 chance." James Stack, editor of InvesTech Research, says, "It's already a bear market."
With signs of economic hardship roiling markets daily, from weak retail sales, to multibillion dollar write-downs by banks, to softening in the manufacturing sector, investors are pricing stocks as if a nasty recession is imminent.
"The mood is ugly," says Joseph Quinlan, chief market strategist at Bank of America. "We need a catalyst to break the negative cycle." Investors, he says, are holding back, preserving cash for an expected rally in the second half of the year.
What could spark a rally? "A surprise three-quarter-point interest rate cut from the Federal Reserve," Schaeffer says.
For now, investors should reduce risk, says Aaron Gurwitz, managing director at Lehman Bros. "You don't want to get in the way of a charging elephant."
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