Traders work on the floor of the New York Stock Exchange in New York on December 1, 2008.
On the day a recession was formally declared, investors cast their vote that economic recovery was nowhere in sight. All broad stock market indexes dropped sharply, with the steepest thrusts coming at the end of the trading day. The Dow ended Monday's session down 679.95 points or 7.7%, one of its worst days in recent months. Other broad market gauges took even steeper dives, with the Standard & Poor's 500, which includes financial stocks, falling 9.93%. The S&P 500 is now down 44% for 2008.
Financials were among the worst performing sectors of the day, with bank stocks dropping more than 17% on average. Shares of Citigroup, Merrill Lynch, Bank of America and Wachovia all fell more than 20%, largely erasing last week's financial-stock rally. Shares of oil companies fell sharply as well on Monday, as the price of crude sank to $49.28 per barrel, a decline of more than 9%. (See the Top 10 Wall Street Meltdowns)
Monday's market drop was accompanied by a mad rush to the safety of Treasury securities, where yields fell yet again. The yield on the 10-year note dropped to 2.748%. Ironically, many on Wall Street believe Treasury securities are no bargain, particularly after November's strong showing, when Treasuries delivered their best performance in more than 25 years. Merrill Lynch even issued a market report Monday morning noting that "Treasuries have moved into overvalued territory," yet added that it did not think the bull market in these securities would end anytime soon.
Moves across all markets on Monday traced back to the economic news, highlighting the belated announcement by the semi-official arbiter of recessions in the U.S. that the country is in fact in a recession. The only real news in the announcement from the Business Cycle Dating Committee of the National Bureau of Economic Research was the starting date that the seven economists on the panel assigned to the recession — last December.
There was also more timely evidence that the economy is in trouble. A much-watched real-time indicator of manufacturing activity, the Institute for Supply Management's monthly purchasing managers index, fell to a 26-year low. The JPMorgan global purchasing managers index, a measure that's only been around since 1998, hit an all-time low, with exporting nations such as China and Korea especially hard hit.
Meanwhile, a National Retail Federation survey showing a 7.2% increase in Thanksgiving-weekend retail spending vs. the year before failed to convince skeptics on Wall Street who still expect a dismal holiday shopping season overall. Even though Thanksgiving sales were stronger than many expected, the steep price markdowns did not augur well for retailer profitability.
But it's not just discrete events like economic releases weighing on the market. There's also the downward pressure — at times dull, at other times sharp — of institutional investors selling out of their stock positions. Part of October's swoon came from hedge funds raising cash to pay investors demanding their money back. While mutual fund redemptions have been a growing part of the story since then, we could still see more forced selling from hedgies.
In a Nov. 28 research note, analysts at Morgan Stanley pointed to growing redemptions from university endowments that have found their portfolio allocations out of whack, thanks to plunging stock prices — a point reinforced today when Paul Tudor Jones's Tudor Investment Corp announced that it had suspended redemptions on one of its hedge funds.
With reporting by Justin Fox and Barbara Kiviat