by Tim Paradis and Stephen Bernard
The Associated Press
Stocks buckled Thursday under the growing belief that the global economy is weaker than many investors expected and is likely to stop the U.S. labor market from rebounding in the coming months.
A flood of bad news, including rising debt levels in European nations and an unexpected jump in the number of Americans filing for unemployment benefits, had investors pulling money out of assets like stocks and commodities that are looking increasingly risky.
Demand for safe haven holdings like the dollar and Treasurys jumped as the euro tumbled. The Dow Jones industrial average fell about 250 points, and all the major indexes were down about 2 percent.
The day’s news reminded investors that the global economic recovery remains tenuous. It also raised questions about whether the market can resume its rebound from 12-year lows it hit last March. Investors were concerned that weakness in foreign economies could spill over to the U.S. and put more pressure on the job market.
The drop was similar to stumbles the market began having in mid-January. Stocks fell then in response to China’s attempts to curb its overheated growth. Those moves raised fears that the other world economies could suffer as a result. The pullback in stocks worsened as leaders in Washington said they would impose tighter regulations on U.S. banks.
The benchmark Standard & Poor’s 500 index fell 3.7 percent in January, its worst month since the market’s climb began last year.
The Labor Department said Thursday that claims for unemployment benefits rose by 8,000 to 480,000 last week. The news disappointed investors who had hoped for a drop. It was the fourth increase in the past five weeks.
The jobless claims numbers chilled expectations that the government’s January jobs report, due Friday, would show that employers added workers in the first month of the year. Analysts currently expect Friday report to show that employers added 5,000 jobs in January. The government is also expected to report that the unemployment rate ticked up to 10.1 percent from 10 percent.
U.S. trading also was affected by European markets, which dropped on concerns about onerous debt levels in countries including Greece, Spain and Portugal. The euro hit a seven-month low against the dollar on the news. The rising dollar hurt demand for commodities, which are priced in dollars and become more expensive to foreign buyers when the dollar climbs.
The concern about jobs and finances in Europe overshadowed improvements in U.S. worker productivity and an increase in factory orders.
In late afternoon trading, the Dow fell 248.64, or 2.4 percent, to 10,021.91, its biggest slide since Oct. 30. The day’s drop erased the market’s gains from the first two days of the week and put the psychological barrier of 10,000 back on investors’ radar. The Dow hasn’t fallen below 10,000 since Nov. 6.
The broader Standard & Poor’s 500 index fell 30.79, or 2.8 percent, to 1,066.49, while the Nasdaq composite index slid 59.86, or 2.7 percent, to 2,131.05.
The bad news on employment and European government debt overshadowed pockets of better than expected sales reports from some U.S. retailers. Macy’s Inc. raised its profit forecast after sales rose and it discounted fewer items.
Manny Weintraub, president of Integre Advisors in New York, said the economy won’t be able to recover and the stock market won’t be able to extend its 11-month run if consumers don’t eventually start spending more. Improvements in unemployment would boost confidence of job seekers and could make those with jobs feel more at ease.
"That’s the whole story. People feel if employment starts to improve you have a big multiplier effect," Weintraub said.
In other trading, bond prices rose sharply, pushing yields lower. The yield on the benchmark 10-year Treasury note fell to 3.61 percent from 3.71 percent late Wednesday.
The Chicago Board Options Exchange’s Volatility Index jumped 17 percent. An increase in the VIX, which is known as the market’s fear gauge, is a sign that investors predict more big moves in stocks.
Demand for safety jumped as investors worried that Portgual, Spain and Greece will have trouble containing rising debt loads. Traders remained skeptical about Greece’s plan to slash its budget deficit from 12.7 percent of the nation’s gross domestic product in 2009 to less than 3 percent in 2012. Meanwhile, Portugal on Wednesday cut a planned treasury bill issue. And Spain said its deficits will be more than anticipated in the coming three years.
Charles Norton, portfolio manager of the ALPS/GNI Long-Short Fund, said the renewed questions about foreign governments’ ability to finance their deficits are a sign that investors have been too optimistic in predicting a recovery in the world’s economies.
Norton said signs of improvement in the U.S. economy are less impressive than they first appear. The government said last week that the economy grew at an annual rate of 5.7 percent during the fourth quarter. A big part of that gain came from companies rebuilding inventories.
"They are the only sources of economic activity that we’ve seen so far," Norton said. "They’re both likely to wane over the course of this year. Then what’s left?"
The rise in the dollar hit commodity prices and stocks of companies that produce them. Crude oil fell $4 to $72.98 per barrel on the New York Mercantile Exchange.
Aluminum producer Alcoa Inc. fell 48 cents, or 3.6 percent, to $13.01, while Freeport-McMoRan Copper & Gold Inc. fell $3.18, or 4.5 percent, to $67.28.
Energy stocks fell as oil slid. Exxon Mobil Corp. fell $1.43, or 2.2 percent, to $65.17, while Chevron Corp. fell $1.71, or 2.3 percent, to $71.50.
Tim Evnin, partner and equity portfolio manager at Evercore Wealth Management LLC in New York, said he thought the slide in the markets was an overreaction but that it wasn’t surprising because problems that led to the financial crisis appeared to be contained at first.
The subprime mortgage crises helped push the U.S. into recession after investors realized how much bad debt was on banks’ books.
"Remember, it was ‘just subprime and that’s not a problem and it will be contained there,’" Evnin said, referring to the brush off many investors initially gave problems with subprime home loans.
Eight stocks fell for every one that rose on the New York Stock Exchange, where volume came to 919.1 million shares, compared with 700.5 million traded at the same point Wednesday.
The Russell 2000 index of smaller companies fell 16.27, or 2.7 percent, to 594.39.
Britain’s FTSE 100 dropped 2.2 percent, Germany’s DAX index slid 2.5 percent, and France’s CAC-40 lost 2.8 percent. Japan’s Nikkei stock average fell 0.5 percent.