|Thursday, August 18, 2011 – Robert Lang and Associated Press|
|More signs of economic weakness sent stocks tumbling around the world Thursday.Economic reports in the U.S. and Japan were the catalyst for the drop. The number of people who applied for unemployment benefits last week was higher than expected. And a report on inflation showed that consumers were paying more for gasoline, food and clothes. Japan said its exports fell 3.3 percent in July from a year earlier – the fifth straight month that exports fell for the world’s third-largest economy.
The Dow Jones industrial average fell 445 points, or 3.9 percent, to 10,958 about an hour after the open. It was down more than 500 points earlier. The Standard & Poor’s 500 index fell 49 points, or 4.2 percent, to 1,144. The Nasdaq composite fell 112, or 4.5 percent, to 2,399.
Thursday’s plunge meant a return of volatility that has sent stocks falling since July 21. It came after stocks had been relatively stable this week – a time when investors were calmed by strong earnings reports.
Money flowed into Treasurys and gold, investments considered to be safer. Gold rose $32.10 per ounce to $1,825.90. That’s up from around $1,400 at the start of the year and around $1,250 at the end of last August. The yield on the 10-year Treasury note fell to 2.03 percent from 2.16 percent late Wednesday. That matches its record low. A bond’s yield falls when its price rises.
Last week, 408,000 people applied for unemployment benefits. That is up from 399,000 the prior week and the highest level in four weeks.
Inflation at the consumer level rose to 0.5 percent in July. That compares with a 0.2 percent drop in June and is the highest level since March. After ignoring price rises for food and energy, the underlying inflation rate was 0.2 percent last month. That’s what economists expected.
When prices are rising at the same time that the job market is weak, the Federal Reserve has a more difficult time stimulating the economy, said Jack Ablin, chief investment officer at Harris Private Bank. The Fed has already said it will keep short-term interest rates at nearly zero into 2013. But the risk of further stoking inflation will hinder it from making more moves, such as a third round of bond buying known as quantitative easing.
“Every time the economy got the sniffles, we had the Federal Reserve standing by with tissues,” Ablin said. “This time around, I think the box is empty, and we’re going to have to go through this alone. I think we can do it. It’s just not something we’re accustomed to.”
The Fed in June completed a $600 billion purchase of Treasurys in its second round of quantitative easing, known as QE2.
Capital Economics economist Paul Dales expects inflation to rise in the next few months. That “will probably prevent the Fed from responding more aggressively to the economic slowdown and latest market turmoil with a third round of asset purchases, at least until early next year,” he wrote in a report.
Worries about Europe’s debt problems also hang over the markets. Some countries have borrowed so much that they may need help repaying their debts. A default by any country would hurt the European banks that hold those European government bonds. U.S. regulators are looking at the U.S. arms of big European banks to see if they have reliable access to funds, according to a report from The Wall Street Journal.
Manufacturing has sharply weakened in the Philadelphia region, according to a report from the Federal Reserve. Manufacturing had been one of the economy’s strongest industries since the recession ended in 2009, but its growth has slowed this year. The Federal Reserve Bank of Philadelphia’s index of activity fell to negative 30.7 in August from 3.2 in July. That is its lowest level since March 2009. It follows a report earlier this month that showed manufacturing weakened in New York.
Meanwhile, the National Association of Realtors said the number of people who bought previously occupied homes dropped in July for the third time in four months.
Stocks in industries that depend on a growing economy fell the most. Industrial stocks in the S&P 500 fell 5.3 percent, technology stocks fell 5 percent and financial stocks fell 4.8 percent.
Crude oil fell $4.39 per barrel to $83.19 on worries that a weaker global economy will mean less demand.
Asian markets started Thursday’s drop. Japan’s Nikkei 225 index fell 1.3 percent. South Korea’s Kospi stock index fell 1.7 percent, and India’s Sensex index fell 2.2 percent.
The market drops extended to Europe. In London, the FTSE 100 index fell 2.4 percent after a report showed that growth in British retail sales slowed more than economists expected last month. Germany’s DAX index fell 3.5 percent.
The Dow fell by 76 points on Tuesday and rose by just 4 points on Wednesday. It was the first time that the Dow rose or fell by fewer than 100 points in two straight days since Aug. 1.
But markets were particularly volatile earlier this month. Worries about Europe’s debt troubles and the weakening global economy overshadowed strong earnings from U.S. companies. The Dow regularly swung by hundreds of points each day.
Early this month, investors worried as the U.S. government said it may default on its debt unless it was allowed to borrow more. The government beat the deadline to avoid a default, but Standard & Poor’s downgraded the U.S. credit rating on Aug. 5 anyway. The credit-rating agency said it had less faith in the effectiveness and predictability of the government after its partisan debates. It cut the U.S. long-term rating by one notch to AA+ from the top AAA rating.
… Remember all of that change Obama keeps talking about since 2008? It’s in your pocket if you’re lucky enough to have any left. …