Investors rushed to get out of stocks Thursday morning as they worried about the prospects for a global recession.
The weakness in stocks also spread to economy-sensitive commodities, with the prices of copper and oil falling sharply. The price of gold fell by more than $70 an ounce, about 4 percent, as the US dollar strengthened compared with the euro.
The stock sell-off was partly a follow-on to Wednesday, when the Dow Jones Industrial Average dropped 283.22 points after the Federal Reserve said “there are significant downside risks to the economic outlook.”
In its statement, the Fed referred to recent indications of “continuing weakness” in the labor market. However, new claims for unemployment actually dropped by 9,000 last week, the Department of Labor reported Thursday morning. Still, the claims remained at a relatively high level, indicating that the jobs market remains weak.
“The four-week moving average is creeping higher, which is not good,” says Anthony Valeri, a market strategist at LPL Financial in San Diego. “If this recent blip up were to continue, you could make the argument we’re going into a recession.”
In his morning comment Thursday, Fred Dickson of D.A. Davidson & Co. in Lake Oswego, Ore., said there was a “perfect storm of bad news” hitting the financial markets from Washington, Europe, and Asia.
In Europe, manufacturing and services activity fell in August for the first time in two years. According to an analysis by Barclays Capital Research in New York, the data indicate the manufacturing sector in Europe “is set to experience recession,” with a considerable gap between new orders and inventories.
Even Germany, which has been buoyant all summer, appears to have hit the brakes, according to an analysis by IHS Global Insight in Lexington, Mass. “Growth was similarly marginal in France following a sharp loss of momentum in September itself,” IHS wrote in its analysis.
“Again, this is a sign we may be flirting with recession, if we are not already in one,” Mr. Valeri says.
In Washington on Wednesday, the House voted down legislation that would have funded the US government through Nov. 18. Republicans objected to spending $6.9 billion on disaster relief without any cuts elsewhere to pay for it, while some Democrats voted against the bill because they wanted more disaster relief.
If Congress can’t reach an agreement, the US government could shut down by Monday. However, the two sides will probably reach some compromise before they leave this weekend, says Pete Davis of Davis Capital Investment Ideas in his morning blog Thursday. “There's no desire on the part of any congressional leaders to shut down the government this time around,” he writes.