Why the stock market took a pounding Thursday

The Dow Jones Industrial Average shed 419.63 points to close at 10,990.58. News from Europe and unfavorable economic reports in the US appear to be factors.

By , Staff Writer

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    A screen displays the closing numbers for the Dow Jones Industrial Average on the floor of the New York Stock Exchange on Thursday, Aug. 18.
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The stock market took another pounding Thursday, with the widely watched Dow Jones Industrial Average shedding 419.63 points to close at 10,990.58.

What’s bothering traders now?

The stock market seemed to get hit Thursday by a combination of jitters over the possibility of a banking crisis in Europe and a series of US economic reports that weren’t very good. The result: a bad taste in many investors’ mouths.

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“I work with a lot of retired folks, and when they see this kind of volatility, they get scared,” says Chris Hobart, CEO of Hobart Financial Group in Charlotte, N.C. “The average Joe in the street is shellshocked.”

The bad news started early on Thursday with reports that an unnamed bank in Europe had to borrow $500 million from the European Central Bank at a penalty rate – in other words, the ECB being the lender of last resort. This once again sparked concerns of a banking crisis, a la 2008, when the Federal Reserve and US Treasury stepped in to save the financial sector.

“This stuff in Europe seems to be escalating,” Mr. Hobart says.

The European economy appears to be weakening more rapidly than policymakers are reacting to it, says David Kotok, chairman of Cumberland Advisors, a money-management firm in Vineland, N.J.

“Policymakers are behind the events and the momentum of the economics. They are struggling to catch up with a moving target,” Mr. Kotok says. “It’s very scary for markets, especially because of the construction of the banks and the banking systems.”

For example, the government of Greece guarantees all the deposits in Greek banks. “What good is that guarantee?” Kotok asks.

Concern about a new banking crisis is one reason that many investors shifted money on Thursday into US Treasury bills. At one point, the 10-year US Treasury note hit a historic low yield of under 2 percent. It finished the day yielding 2.08 percent.

At the same time on Thursday, US economic news was far from good. The Philadelphia Federal Reserve published an index of area economic activity that fell from a positive 2.7 to a negative 30.7 in July.

Some investors worried that this might foreshadow a report by the Institute for Supply Management (ISM) that comes out Sept. 1. The last report indicated the economy was growing very slowly. Now, there are concerns the upcoming report will show the United States is heading for recession.

“The economy appears to be unraveling very quickly,” says Sam Stovall, chief investment strategist at Standard & Poor’s in New York. “

If it is unraveling, it has yet to cause a sizable number of layoffs. New claims for unemployment increased to 408,000 for the week that ended Aug. 13, the government reported Thursday. That number was up about 9,000. However, for the seventh consecutive week, the four-week moving average, which smooths out weekly fluctuations, was lower, coming in at 402,500.

“They don’t indicate massive layoffs,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “It just looks like we’re seeing business make small corrections.”

While businesses may be making small corrections, the stock market seems to be making large ones. Part of that is because of computerized trading, which moves the market quickly depending on its expected direction.

“It’s called momentum trading, and once it starts, it’s hard to get it to stop and go back the other way,” says John Papa, president of Diversified Planning Strategies in Caldwell, N.J.

In the past few weeks, after a big loss, the stock market has rebounded with a big gain. Will it happen again on Friday?

“Who knows,” answers Mr. Papa. “From its track record, it could be up 500 tomorrow. It’s a crazy time.”

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