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Stocks Plunge Over Fear About World Economy

Stock markets around the world have plunged as investors react nervously to the Federal Reserve's 'Operation Twist'.
Justin Sullivan
Stock markets around the world have plunged as investors react nervously to the Federal Reserve's 'Operation Twist'.

Stocks plunged Thursday, extending a rout around the world. Indicators across the financial markets had investors concerned that there's no clear way the U.S. will avoid another recession.

At 10 a.m. Pacific time, the Dow Jones industrial average fell 425 points, or 3.8 percent, to 10,699.

It fell 283 points on Wednesday after a tacit acknowledgment from the Federal Reserve that the U.S. economy won't improve anytime soon.


The Standard & Poor's 500 index fell 41, or 3.5 percent, to 1,128. The Nasdaq composite fell 82, or 3.2 percent, to 2,456.

The price of commodities like oil and metals dropped steeply because investors worried that demand for them would fall if the world economy keeps slowing or falls into recession again.

Looking for a safe place to put their money, traders bought American government debt, which they see as much less risky than stocks. The yield on the 10-year Treasury note hit a record low of 1.77 percent, down from 1.86 late Wednesday. Yields fall as investors buy bonds and send their prices higher.

The Fed, adopting a new strategy to try to get the U.S. economy going, announced Wednesday that it would shuffle $400 billion of its own holdings in hopes of reducing interest rates on long-term loans.

The central bank hopes that allowing people and businesses to borrow money more cheaply will encourage them to spend it throughout the economy, providing a lift that could turn it around.


The Fed statement troubled investors. It offered a bleak assessment of the future of the U.S. economy, saying it sees "significant downside risks to the economic outlook," including volatility in overseas markets.

"What we're seeing is the ebbs and flows around a big risk that everyone's having difficulty dealing with," said Barry Knapp, head of U.S. equity strategy for Barclays Capital. "We're just going to be dealing with these waves for some time to come."

Investors also fear that the Fed has maxed out its options for aiding economic growth.

"Counting on the Fed to get us out of this is a mistake," said Uri Landesman, president of New-York-based hedge fund Platinum Partners. The only thing that will fuel a recovery now, said Landesman, is if consumers and businesses spend more.

Asian stocks were hammered to start the world's trading Thursday. The Nikkei index in Japan fell 2.1 percent. The main stock averages fell 2.9 percent in South Korea, 2.6 percent in Australia and almost 5 percent in Hong Kong.

Europe fared even worse. The stock market fell 5.4 percent in France, 4.6 percent in Germany and almost 5 percent in Britain. Besides the economic headache, Europe is wrestling with how to tame a big debt problem.

In New York, stocks fell sharply even though the New York Stock Exchange executed a rule designed to smooth trading.

The exchange invoked Rule 48, which limits how much information is released about stock trades. It is only used on days when extreme volatility is expected in the stock market.

Stock volatility jumped. The VIX, an index that measures investor fear, rose 7.2 percent to an index level of 40, well above the index's average level. It's common for stocks to move dramatically after the Fed makes a big announcement. But the number of trades that can be made instantly has also gone up in recent years, causing big swings to happen more quickly.

"These major moves are much more compressed, time-wise, than in the past," said Landesman. "A 5 percent move can now happen in a couple of minutes as opposed to a week or two."

The price of oil fell 6 percent, more than $5 a barrel, to $80.76, its lowest since Aug. 19. The selling reflected concerns that world demand for oil would fall if the economy slows.

And the price of gold fell more than 4 percent. Earlier this summer, gold set one record high after another. Investors wanted it both as a safe place for their money and to cash in on what seemed an unstoppable run.

The government reported Thursday that fewer Americans filed new claims for unemployment benefits last week. But the decline wasn't nearly enough to raise any real hope that the job market is getting better.

FedEx stock fell 9 percent after it said that it would earn less in 2012 than it had expected. The company is seen as an indicator because demand for shipping rises and falls with the economy.

The next big round of corporate earnings reports doesn't start for several weeks, but many analysts expect big companies can't sustain the strong profits they have posted for the last few quarters.