Streams

Stocks Drop as Attention Returns to Weak Economy

Wednesday, August 10, 2011

The Dow Jones industrial average closed down 520 points Wednesday on a day that concern over the weakening economy continued to percolate on Wall Street and send stocks tumbling.

Investors turned their attention back on the economy and Europe's debt trouble — erasing gains from Tuesday that followed the Federal Reserve's pledge to keep its key interest rate at nearly zero into 2013.

The Dow fell 429 points, or 3.8 percent, to 10,811 in afternoon trading. Within minutes of the opening bell, the Dow plunged more than 300 points and was down as many as 468 in the late morning.

The drop hit banking stocks especially hard.  Shares of Citigroup, Goldman Sachs and Morgan Stanley were all done more than 10 percent. Increasingly, investors are worried about a global economic slowdown and perhaps even a "double dip" or second recession.  

"If we do go into another recession and if unemployment rate does bounce back to 10 or 11 percent, you could see a worsening credit picture with lower revenues and that’s just not a recipe for a growth stock that investors like to embrace," said Paul Miller, a banking analyst for FBR, a boutique investment banking firm.

Slower economic growth could lead to fewer loans issued by banks and a drop in corporate mergers or expansions. That in turn would cut bank profits. In recent weeks, several financial firms have announced layoffs. On Wednesday, Bank of New York Mellon said it would cut 1,500 or three percent of its workforce.

On Tuesday, the Dow surged 429 points following the Federal Reserve's pledge to keep its key interest rate at nearly zero into 2013.

But the statement also included a dim assessment of the economy and said growth had been "considerably slower" than anticipated.

And some analysts and investors said the gains were likely a blip caused by computerized trading based on programs that decide when to buy or sell.

With the Associated Press

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