Economic Pessimism Sends Stock Indexes Down More Than 4 Percent

By Eyder Peralta

Published August 4, 2011 at 9:55 AM MDT

Traders work on the floor of the New York Stock Exchange on Thursday, as stocks plunged in another broad sell-off.

Update at 4:09 p.m. ET. Dow Plunges 513 Points:

At closing, the Dow finished 513 points lower. The AP reports today was the worst day for markets since the financial crisis:

Major stock indexes fell more than 4 percent. The Dow is closing with a loss of 513 points, or 4.3 percent, to 11,384. It was the worst day for the Dow since October 22, 2008.

The S&P 500 is down 60, or 4.8 percent, to 1,200. The Nasdaq is down 137, or 5.1 percent, to 2,556.

In our original post, we wrote about the causes of the drop.

Our Original Post:

At one point this morning, the Dow Jones industrial was down 350 points, mirroring the drop in Standard & Poor's and most stock markets in Europe. As theLos Angeles Timesputs it, today the market came down from yesterday's U.S. rally as pessimism "about the economy overtook investors around the globe."

The Times reports:

Before trading opened on Wall Street, the Labor Department announced that the number of people applying for unemployment benefits last week fell slightly from the week before. But the report, following a raft of disappointing economic data in recent days, was taken by many gloomy investors to indicate only that the stalled job market is not improving.

Some investors also are selling to protect their portfolios before Friday's monthly announcement of unemployment data.

For the rest of the day, expect some wild swings. Dow Jones Newswires reports that the markets were "primed for another volatile session."

Here's one financial strategist describing the mood to Bloomberg:

"The mood right now is gloomy," Mike Ryan, the New York- based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $774 billion. "The burden of proof is for better data that show the economy is not falling into recession. Tomorrow's payroll report is crucial. If we see another disappointment, the stock market will have significant downside from here."

Update at 12:04 p.m. ET. 'On The Cusp Of Recession'?

As The New York Timesputs it, one thing haunting the markets right now is a fear that the United States is sliding back into a recession. Yesterday, U.S. News & World Report looked into the possibility of a double dip recession.

Essentially, they report, the economy has barely grown in 2011. During the first quarter the GDP grew by .4 percent and by 1.3 percent during the second quarter. If you remember that second quarter number was recently revised downward from close to 2 percent.

"We're on a knife edge right now," Justin Wolfers, associate professor of business and public policy at The Wharton School of the University of Pennsylvania, told U.S. News. "We're on the cusp of recession. We maybe already have had one —that's really just one data revision away."

The White House's Press Secretary Jay Carney dismissed the threat during his press briefing, yesterday. He said:

Well, we do not believe that there is a threat there of a double-dip recession. We believe that the economy will continue to grow. There is no question that growth has slowed over the past two quarters. There's no question that job creation has slowed. But there are reasons for that --again, some of them beyond our control — but that are beginning to — the headwinds created by them like the earthquake in Japan, have subsided somewhat. But there are other challenges that we have to contend with, including high energy prices, the situation in Europe, et cetera.

Harvard University economics professor Martin Feldstein told Bloomberg earlier this week that he sees a 50 percent chance that the U.S. economy will slide into recession:

Feldstein cited continued weakness in housing and employment. U.S. consumer spending unexpectedly dropped in June for the first time in almost two years, Commerce Department figures showed today in Washington.

"Nothing has given us much growth," Feldstein said. "The economy has been flat to down since the beginning of the year."

Update at 12:40 p.m. ET. The European Debt Crisis:

Another piece of news that's having a tough effect on the markets is that today European Commission president Jose Manuel Barroso warned that the debt woes that have plagued Greece, Ireland and Portugal might be spreading to Italy and Spain.

The Guardian compares this week in the world markets to the tumultuous weeks leading up to the banking crisis in 2008. The paper reports that the issue in Europe, right now, is that borrowing costs for Italy and Spain might become unsustainable.

Italian and Spanish 10-year bond yields are at 6 percent and Barroso said the mechanisms for potentially bailing out these countries needs to be reexamined and strengthened, because analysts don't believe that the "€440bn (£382bn) European financial stability facility (EFSF) and its €500bn replacement, the European stability mechanism (ESM)" have "sufficient firepower to handle a bailout of either Italy or Spain, having already provided support to Greece, Ireland and Portugal."

"It is increasingly becoming apparent that this economic recovery will be slower and more difficult because nations and some consumers are overladen with debt," Louise Cooper, markets analyst at BGC Partners, told The Guardian. "Repaying the loans will take longer and be more painful than we had previously anticipated. We are in a catch-22 situation. We desperately need growth to pay off the debt, but we cannot grow because of the amount of debt we owe."

In very practical terms, all of this instability means investors are looking for safety. Dow Jones Newswire reports that today gold hit record highs, rising to as much as $1,682.70 a troy ounce.

Update at 2:27 p.m. ET. 400 Points:

The AP just moved this news alert:

Dow Jones industrial average briefly falls as many as 400 points.