Worries that the sudden economic downturn is going global sent Wall Street plummeting Thursday, with the Dow Jones industrial average falling more than 500 points in the worst market rout since the 2008 financial crisis.
Since the market's troubles started last month, major indexes have lost 10 percent or more of their value, with the Dow down by more than 1,300 points in all. The Dow and the Standard & Poor's 500 index of blue-chip stocks both saw their worst point drops since the dark days of the financial crisis, when major banks were teetering toward collapse.
While the U.S. market has been plagued with worries all week about a double-dip recession, Thursday's sell-off was triggered by renewed fears about Europe, where two of the largest economies — Italy and Spain — are being drawn into that continent's debt crisis. The spreading debt woes across the Atlantic raise the risk that Europe — the largest export market for American companies — may be headed for a recession as well.
Moreover, major U.S. and European banks are heavily exposed to the debt of Italy, Spain and other European countries and could suffer big losses that could set off a cascading banking crisis like the one that nearly toppled the financial system in 2008, some investors fear.
"Nobody's feeling good. Everyone's in a state of panic," said James Altucher, a financial author and Wall Street Journal contributor.
Mr. Altucher is one of many commentators who say the economy is doing better than what the markets reflect.
"It's actually not that bad," he said. "We're not in a banking crisis. We're not in a housing crisis," he added, noting that U.S. banks, unlike in 2008, have $1.3 trillion in surplus funds to lend and are profiting greatly from the Federal Reserve's loose money policies.
Consumers also are doing well despite the "scary" headlines, he said. A report on consumer spending this week showed a collapse of spending in the second quarter, a development that triggered steep market losses.
Regardless of whether the worries about the economy are justified, the stock losses are already deep, and many investors are getting out of the market to avoid further losses, said Tomi Kilgore, a columnist with Dow Jones Newswires.
"This is not a normal pullback," he said. "We have to start preparing for what could be the worst-case scenario" — a drop of 20 percent or more, as occurred during the 2008 crisis.
Analysts note that many consumers, already hesitant to spend, will be spooked further by the market losses.
The stock market's good performance until recently had been one of the few solaces for wealthy and middle-income consumers, giving them a sense of growing wealth as the value of their retirement funds expanded even as the value of their homes — their biggest investments on average — continued to sink.
Further fallout from the U.S. debt crunch is also undermining the market as analysts pore over the details of a debt-reduction deal enacted Tuesday that cuts nearly $1 trillion of spending from the discretionary portion of the federal budget, which funds most government contracts with businesses.
The cuts in domestic and defense programs would deepen further if Congress comes to an impasse again this year on curbing the growth of entitlement programs and raising taxes. That would trigger huge, across-the-board cuts in the discretionary budget in 2013.
An estimated 40 percent of S&P 500 companies get a significant share of their revenue from the federal government, analysts say. With such large cuts looming, the stocks of companies in defense, health care, transportation and a range of other industries plunged.
The Dow closed down 513 points, or 4.3 percent, at 11,384, registering its ninth-largest point drop in history and the largest since Dec. 1, 2008. The S&P 500 fell 60 points, or 5 percent, to 1,200 in a broad sell-off that affected every major industry group. The Nasdaq composite index also lost 5 percent to end at 2,556.
Even before the U.S. market opened, stock indexes in Europe plunged from 3 percent to 4 percent in Thursday trading, and Brazil's main stock index took an even heavier hit, plummeting by 5.7 percent. Asian trading continued the slide Friday morning, with indexes in Japan, South Korea and Australia all down by 4 percent.
With the stock market in full retreat, investors piled into safe havens from the storm. Gold prices soared to a record of $1,684.90 an ounce before retreating.
The prices of oil and other commodities that rise when the economy is doing well plummeted. The 6 percent drop in premium crude prices to $86.53 in New York trading likely will lead to significantly lower gasoline prices in the weeks ahead, which could provide a significant boost for beleaguered consumers.
Only days after America's own debt crunch rocked global markets, investors dove into Treasury bonds, sending the yields on Treasury's two-year note to a record low of 0.265 percent. Such lower interest rates also are a silver lining in the crisis, as they will filter through to indebted consumers and corporations as well as the debt-strapped federal government.
Michael Pento, senior economist at Euro Pacific Capital, said that despite the troubling outlook, the U.S. dollar and Treasury market are benefiting from the even worse debt problems in Europe.
While the U.S. government's public debt has risen to about 65 percent the size of the U.S. economy, the Italian government's debt is twice that size.
As a result, the average interest rate that Italy pays on its 10-year bonds has doubled to 6 percent from 3 percent earlier this year — nearing levels that are prohibitively high for the nation, he said. U.S. 10-year bond yields fell to 2.42 percent Thursday by comparison.
"A doubling of interest-rate expenses spells disaster" for Italy and the European Union, Mr. Pento said. The EU has few tools to assist a country as large as Italy, and countries there already have been feuding over the need to bail out much smaller debtors, such as Ireland and Greece.
In about the only remedy available, the European Central Bank on Thursday signaled that it will resume its program of buying troubled nations' bonds in an attempt to help lower the interest rates they pay and relieve banks of their sovereign debt load.
"Problems at the overly indebted countries just get worse," Mr. Pento said, predicting that Italy and Spain will follow the path of Greece into a full-blown debt crisis.
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