- The Washington Times - Tuesday, February 27, 2007

The Dow Jones Industrial Average plunged 416 points yesterday, the most since the September 11, 2001, terrorist attacks, as worries about the U.S. economy suddenly surged and sent inflated stock markets tumbling around the world.

The chain reaction started in China, where a 9 percent drop in the main stock index, the worst in 10 years, was triggered by government moves to quell stock speculation and a speech by former Federal Reserve chairman Alan Greenspan pointing out that profits in the U.S. have peaked and the business cycle may be drawing to a close with a recession possible — though not likely — by year-end.

After reverberating in trading in Asia and Europe on Monday night, doubts about the U.S. economy were reinforced by fresh data yesterday raising fears that the U.S. housing and manufacturing sectors are headed back into recession as a result of sharply tighter credit conditions and the end of a capital spending boom.

“It’s a mood swing to more concern about the economy,” said Alexander P. Paris, analyst at Barrington Research Associates Inc. He noted that the darker outlook likely will be underscored by news today that economic growth slowed to 2.5 percent or less at the end of last year.

“Superimposed on that you have this China thing. That’s the powder that ignited it,” he said. Like many economists, Mr. Paris says the economy is fundamentally healthy and that the market is overreacting to the weak points.

In a frenzied day of trading, every stock sector posted big losses. The market started out the day with a mild downturn, but the sheer volume of trading caused a computer glitch that turned the downdraft into what looked like a free fall about 2:30 p.m., when the Dow dropped suddenly by about 300 points.

Dow Jones & Co. Inc. said it discovered its computers were not properly calculating trades and it had to switch to a backup computer, which caused the massive swoon in the index.

The Dow fell 546 points, or 4.3 percent, to 12,086 before recovering some ground in the last hour of trading to close down 3.29 percent to 12,216. Because the worst of the plunge on the Dow and the Standard & Poor’s 500 Index did not exceed 5 percent, the New York Stock Exchange’s trading limits, designed to halt the most precipitous moves, were not activated.

Nevertheless, in terms of points, the Dow’s drop was the worst since Sept. 17, 2001, the first trading day after the terrorist attacks, when the blue chips closed down 685, or 7 percent. Just a week ago, the Dow had reached a new high of 12,796.

The broader S&P; 500 lost 50 points, or 3.47 percent, to end at 1,399, while the tech-dominated Nasdaq Composite Index fell 97 points, or 3.86 percent, to 2,408.

Before the Wall Street drubbing, European markets fell from 1 percent to 3 percent on the Chinese news. Hong Kong’s benchmark Hang Seng Index dropped a relatively mild 1.8 percent.

Traders expect Wall Street’s losses to reverberate in markets overnight and possibly lead to more selling in the U.S. today.

Bryan Piskorowski, stock analyst at Wachovia Securities, said the market’s “nasty little sell-off” was due to “good old-fashioned profit-taking” after seven straight months of market gains in the U.S. that had left most stocks at lofty price levels.

“The market was due for a pullback. We’re getting it,” he said. “The size and scale was somewhat surprising,” he added, but he expects the market to resume its upward trend after reaching a bottom in the next few days.

Mr. Piskorowski noted that the drop was less than 5 percent on Wall Street, and even the 9 percent drop in the Shanghai Composite Index looked minor against the backdrop of a 130-percent gain in Chinese stocks in the past year and a 13 percent run-up in the previous six sessions.

Still, the economic outlook has dimmed in the past month. A Commerce Department report yesterday of a 7.8 percent drop in orders for big-ticket goods from U.S. factories in January showed that “growth in the manufacturing sector ground to a halt in September 2006 and continues to struggle as consumers rethink big-ticket spending and businesses turn risk averse in their capital spending,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance.

But the biggest change of fortunes has been the collapse in housing. After stabilizing somewhat at the end of last year, a plunge in home building resumed last month, and a potentially destabilizing fall in home prices got deeper. A report from the National Association of Realtors yesterday showed a 3.5 percent drop in the median home price nationwide — and prices have fallen even further in big cities such as Boston and San Diego.

Economists expect the housing downturn to worsen before it gets better as increasing defaults on mortgages for the purchase of overpriced homes are starting to pinch home lenders and prompt them to close the spigot of easy money that fueled the housing boom.

Mortgage giant Freddie Mac announced yesterday it will no longer buy high-risk home mortgages prone to foreclosure, such as loans made with little or no documentation of a borrower’s income and job status.

“The housing market is in the middle of a far-reaching adjustment,” said Roger M. Kubarych, economist at Unicredit Markets. While consumer confidence and spending has been holding up well, the downturns in housing and manufacturing will slow growth in the first half of the year to the weakest pace since the 2001 recession, he said.

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