Weak Data, Economic Fears Provoke Stock Sell-Off

U.S. and European stocks plunged Thursday as investors worried the global economy might be slipping back into recession. The major U.S. market indexes were down sharply. Gold surged and oil fell. And safe haven money kept flowing into U.S. Treasuries.

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Investors anxiously watched the opening of the financial markets this morning, and both indexes were down, slightly. That follows yesterday's massive sell-off on Wall Street, when the Dow fell almost four percent and the S&P 500 fell four and a half. Weak economic data in this country and worries about banks in Europe have led to fears that the economy is sliding back into a recession.

NPR's Jim Zarroli reports.

JIM ZARROLI: After the tumult of the last few weeks, the financial markets appear to have stabilized a bit. Then yesterday, volatility returned - big time. Stocks opened way down and just kept falling.

Gold prices soared, and interest rates on government debt plummeted. The yield on the ten-year treasury bill fell below two percent. Economist Joel Naroff.

Mr. JOEL NAROFF (Economist): The rates that we're looking at right now are essentially unheard of.

ZARROLI: The drop in rates is good for the economy because it's brought down mortgage to levels not seen in more than 50 years. That's likely to spark a new round of refinancing for those with good credit.

But the decline is also a sign of weakness in the economy. Naroff points out that inflation is now running at more than three percent. So someone who buys a government bond paying two percent, is actually losing money. But U.S. government debt is considered a safe investment. The recent credit downgrade notwithstanding, and such is the level of anxiety right now that many investors are willing to take the loss.

Jack Ablin of Harris Private Bank says that's what pushed rates below two percent yesterday.

Mr. JACK ABLIN (Executive Vice President, Harris Private Bank): So the fact that we're breaching that level at least sends a very, you know, important signal, or at least an ominous signal that, you know, one that we have to take pretty seriously.

ZARROLI: What scared investors were dangers, both foreign and domestic. The U.S. economic picture has been mixed lately, but yesterday some decidedly weak data came out.

John Lonski, chief economist at Moody's Capital Markets says there was a big drop in the so-called Philly Fed Index.

Mr. JOHN LONSKI (Chief Economist, Moody's Capital Markets): The shocking weakness of the Philadelphia Feds Index of regional manufacturing activity suggests that financial panic may have begun to paralyze real economic activity.

ZARROLI: But the real fear stalking the markets remains the problems facing European banks and the question of how much bad debt they're holding. Yesterday the Wall Street Journal said federal officials are worried about the assets of the bank's sizable U.S. subsidiaries. Lonski says investors are growing more concerned about a Lehman-style meltdown, and what it would mean for the rest of the world.

Mr. LONSKI: It's hard to imagine how such a calamity would remain limited to Europe.

ZARROLI: All of these worries are building, leaving investors fearful about the big picture of the economy. But Jack Ablin says many individual companies in the United States continue to be very profitable, and Ablin says each time the market has fallen sharply, investors have rushed back in to pick off cheap stocks.

Mr. ABLIN: There's a tug-of-war between what I'll call the big picture and then the little picture.

ZARROLI: Still the overall trend, lately, has been down. Stocks have been plunging and people are pouring money into what they consider safe investments like gold.

John Lonski of Moody's says that if stocks keep falling, it's bound to have an impact on consumer spending.

Mr. LONSKI: Laying a bare market in equities, on top of existing home price deflation, may prove to be too great of a burden for a still fragile economic recovery.

ZARROLI: Whether that will be enough to derail the recovery and push the economy back into recession is an open question. A few months ago, few economists were predicting such a steep slowdown in growth, but now virtually all of them are cutting their growth projections.

For instance, Harvard's Martin Feldstein is president emeritus of the National Bureau of Economic Research, the academic body that determines when economic cycles begin and end. This week, he said, the chances of another recession are 50/50.

Jim Zarroli, NPR News, New York.

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