- The Washington Times - Tuesday, September 1, 2009

UPDATED:

NEW YORK (AP) — The stock market’s rally finally gave way on Tuesday, sending shares sharply lower as investors concluded that the weak economy didn’t justify Wall Street’s six-month surge.

In early afternoon trading, all the major indexes fell more than 1.5 percent, including the Dow Jones industrials, which lost about 160 points. The biggest declines came from financial and energy companies.

Meanwhile, bond prices edged higher as investors sought the safety of government debt. Oil prices fell sharply on concerns that the economy isn’t strong enough to support higher demand for energy.

The plunge in stocks came even though the Institute for Supply Management reported that U.S. manufacturing grew in August for the first time since January 2008. The market also shrugged off another positive economic report, the sixth straight monthly increase in pending home sales.

Investors have long since factored in an economic recovery into stock prices, but analysts, worried that investors have been too optimistic, have been anticipating a downward turn. Stocks had surged more than 50 percent since hitting 12-year lows in early March, but trading has been choppy recently as investors also questioned whether their bets on the economy have been warranted.

“The market’s priced all of this in, and a lot more, quite frankly,” said Jeff Buetow, managing partner at Innealta Portfolio Advisors. “I just don’t see the growth out there.”

On the surface, the day’s economic numbers were good. But a deeper look at the data gave some cause for concern.

Analysts said both the manufacturing and housing reports got a boost from government stimulus efforts, including the Cash for Clunkers program that has since expired, which means the recovery in those sectors may not continue at the same pace.

“In both cases it seems headlines overstate details by a touch,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC. “People reviewed the numbers and said this type of demand is just not sustainable.”

Investors are also hesitant to buy stocks ahead of Friday’s employment numbers, which could reveal more bad news about the job market, one of the worst remaining problem areas in the U.S. economy.

The Dow Jones industrials dropped 161.12, or 1.7 percent, to 9,335.16. The Standard & Poor’s 500 index fell 18.03, or 1.8 percent, to 1,002.59, while the Nasdaq composite index fell 33.58, or 1.7 percent, at 1,975.48.

Nearly five stocks fell for every one that rose on the New York Stock Exchange, where volume came to 766.5 million shares, compared with 516.2 million at the same time on Monday.

In other trading, the Russell 2000 index of smaller companies fell 12.13, or 2.1 percent, to 559.94.

Bond prices turned mostly higher after stocks began to fall and investors went in search of safer assets. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.38 percent from 3.40 percent late Monday.

Light, sweet crude for October delivery tumbled $1.02 to $68.94 a barrel on the New York Mercantile Exchange, bringing down shares of energy companies with it.

The dollar was mixed against other major currencies, while gold prices fell.

Although the market pulled back in recent days, stocks managed to put in their best August since 2000. September, however, is historically the worst month for stocks.

“It’s a self-fulfilling prophecy,” said Steve Stahler, president of The Stahler Group in Baton Rouge, La., of investors entering the month knowing it’s typically weak.

Stahler added that there are no longer indicators on the horizon that can continue to propel the market forward at such a dizzying pace.

“We’ve had a heck of a run,” Stahler said. “When has that type of gain been sustainable? It never has.”

Overseas, Japan’s Nikkei stock average rose 0.4 percent. Britain’s FTSE 100 dropped 1.8 percent, while Germany’s DAX index tumbled 2.5 percent and France’s CAC-40 fell 1.9 percent.

China’s Shanghai Composite Index rose 0.6 percent after a 6.7 percent plunge on Monday that sent a wave of selling around the globe, including in the U.S., where the Dow lost about 48 points. The sell-off in Chinese stocks, which have been volatile this month, was driven by concerns over that country’s economy.

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