NEW YORK (AP) — Stocks plunged again Wednesday as investors turned their attention back to the weak economy and Europe’s debt problems. Most of the big gains that followed a Federal Reserve pledge to extend super-low interest rates vanished. The Dow Jones industrial average fell 520 points, or 4.6 percent, to 10,720 1 in afternoon trading. The average plummeted more than 300 points within minutes of the opening bell and was down as many as 468 points by late morning. The S&P 500 fell 52, or 4.4 percent, to 1,121, and the Nasdaq fell 101, or 4.1 percent, to 2,381.
On Tuesday, the Dow gained 429 points after the Fed said it planned to keep interest rates extremely low at least through the middle of 2013. It was the first time the Fed announced such a timetable. But the day’s gains were likely just a blip caused by computerized trading based on programs that dictate when to buy or sell, some investors and analysts said.
The rally was “so unbelievably fast, it’s as though every computer on Wall Street hit the point where the program said ‘buy, buy, buy, buy, buy’,” said Daniel Alpert, managing partner of investment bank Westwood Capital. “Machines don’t read Fed announcements, people do — and they were reacting in a negative way.”
That was more evident Wednesday, as investors focused on Europe and the Fed’s pessimistic assessment of the U.S. economy.
“You’re always going to get people looking for a silver lining in a bear market, and that’s all that Tuesday was,” said Paul Simon, chief investment officer of chief investment officer for Tactical Allocation Group, which has $1.5 billion in assets under advisement. “There are a complex set of issues here and in Europe, and there aren’t a whole lot of positives there.”
The European financial system has been battered by fears about banks’ holdings of bonds issued by heavily-indebted countries, such as Greece and Portugal. This week, those concerns have evolved into fears about banks’ exposure to other banks, analysts say. Societe Generale, France’s second largest bank, was down more than 20 percent at one point.
“It’s the same game of Old Maid playing out in Europe that was played out here during the subprime mortgage crisis,” said Quincy Krosby, an economist and market strategist with Prudential financial. As the contagion hits ever-larger countries, such as France, “the ramifications for the banks are more detrimental,” Krosby said.
The drop for European bank stocks pulled down U.S. financial stocks, which led the U.S. market lower. One big reason: investors don’t know how exposed U.S. banks are to the European financial system, via their ownership of debt of European countries and banks, Krosby said. From a trader’s perspective, “at the end of the day, if there’s one cockroach, there’s a million,” she said.
The 10-year Treasury note, which has also served as a haven, rose sharply. Its yield fell to 2.20 percent from 2.26 percent late Tuesday. It had reached a record low of 2.03 percent on Tuesday. A bond’s yield falls when its price rises.
Investors have bought U.S. government debt even after S&P stripped the United States of its top credit rating, AAA, late last week.
But stocks have dropped so much that six companies have withdrawn plans to sell their stocks this week on U.S. markets for the first time, according to Dealogic. That brings the total number of withdrawn initial public offers, or IPOs, to 65 so far this year. That’s the most through Aug. 10 for any year since 2001.
