Dow Jones Sinks 514 Points While Dollar Reaches 2-Year High

October 28th, 2008

Even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson indicated Wednesday that Americans would “have a number of difficult months ahead…in terms of the real economy.” This followed Wednesday’s Dow Jones Industrial Average’s dramatic drop of 514 points amid fears of a recession and concerns that government intervention won’t be enough to prevent global economies from faltering. Wednesday’s sell-off came after poor earnings from large companies in disparate sectors — Wachovia Corp., Boeing and Merck & Co. — exposed how wide the economic downturn has spread

Drops and Recoveries and Drops

Recent dramatic drops — two of them over 700 points each— were followed by almost immediate rebounds. If this doesn’t repeat itself, the Dow could slip closer to closing below the 8,000 mark, which hasn’t happened since March 31, 2003. Since stocks began tumbling on Sept. 15, the Dow has plunged as low as 8,451.19 on Oct. 10. On Wednesday, it closed at 8,519.21. Big rallies last Monday and Thursday were enough to send all the major indexes higher, giving Wall Street its best week since 2003. The Dow gained 4.75 percent for the week — a gain that was erased in Wednesday’s trading alone.
Stocks dropped across Asia and Europe, falling even harder in South America, where Brazil’s Bovespa index and Argentina’s Merval had losses near 10 percent. Argentina’s president announced plans to nationalize private pension funds to protect retirees from the financial crisis.

World Leaders to Meet Again

World leaders will gather in Washington on Nov. 15 to discuss the crisis. A senior US administration official said Wednesday that the forum will be the first in a series of international meetings to discuss what economists predict could be a long and deep downturn. But for many companies, the damage has already been done.

Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system. The changes could be the most sweeping since the 1930s, when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
Democrats in Congress are also pushing to assemble a second economic stimulus program that could total $150 billion or more. On Monday, Fed Chairman Ben Bernanke said a significant stimulus package is forthcoming. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.

Credit Markets Do Better

On a positive note, credit markets showed some signs of a thaw. Yields on Treasury bills and the interest rates banks charge each other have both fallen back to late-September levels. Bank-to-bank lending rates fell sharply overnight.

The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 3.54 percent from 3.83 percent, dropping for an eighth straight day. Libor is significant because many mortgage and credit card rates are pegged to it and it’s a good barometer of banks’ willingness to lend. However, despite declining rates, the volume of loans remained weak.

On the currency scene, while shares in Asian markets fell to four-year lows, the flight from emerging market debt and stocks helped push the dollar to a two-year high against a basket of currencies with the dollar index up 0.2 percent to 85.6 after hitting a two-year peak above 86.

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Entry Filed under: Stock Market News