Stocks stumble out of the gate
Hopes for a strong start to the new year barely lasted a half hour Wednesday as stocks ran smack into the exact same fears that caused so much trouble in 2007.
All three major stock market indexes started sliding following a morning report showing manufacturing activity slowed in December, and the selling accelerated after oil prices briefly spiked above $100 a barrel. The news fanned concerns that the economy could be teetering on the edge of recession - and triggered Wall Street's worst January-opening performance in 15 years.
"It's just bleeding out there," says Oliver Wiener, trader at BTIG. "No one wants to put money to work."
The Dow Jones industrial average fell 221 points, or 1.7 percent, to 13,044. That was the Dow's poorest first day since 1983, says Dow Jones Indexes.
It wasn't much better with the broader Standard & Poor's 500 index. The S&P lost 21.20 points, or 1.4 percent, to 1447, which was the index's worst beginning since 2001 and sixth worst first-day performance since 1932. Tech stocks also suffered, with the Nasdaq falling 43 points, or 1.6 percent, to 2610.
Stocks kicked off 2008 in such poor fashion for several reasons, including:
- Ominous data points. A report from the Institute for Supply Management showing a decline in manufacturing activity, complicated with higher oil prices, sent the "worst possible signal for the stock market," says Richard Cripps of Stifel Nicolaus. Weak manufacturing portends lower corporate earnings, and higher energy costs may stop the Federal Reserve from being aggressive in cutting short-term interest rates on the fear of stoking inflation, he says. "It's the both worlds coming together that make it a difficult time," he says.
- More troubles in financials. Financial stocks, which had been a pillar of stability up until last summer, continued to buckle. The Financial Select Sector SPDR, which mirrors financial stocks, fell 2.0 percent. Investors are holding back as they wait for big Wall Street banks to report earnings in a few weeks and "are bracing for more write-downs" of bad loans, says Michelle Clayman of New Amsterdam Partners.
- Nervous traders. Investors and traders who bought into the S&P 500's 7.7 percent rally from Nov. 26 to Dec. 10 were quick to lock in any remaining profits when 2008 got off to such a poor start, says Doug Sandler of Wachovia Securities. "Reality is setting in at the beginning of the year," he says.
Whether the market can shrug off its problems this time, as it did following three big pullbacks in 2007, will hinge on fourth-quarter earnings reports due the next few weeks, says Charles Crane of Scotsman Capital. "If profits disappoint, that's the greatest risk in this market," he says.
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