Investors looking for a good old new-year rally in stocks were pounded again Tuesday, as share prices posted their worst opening five days since the 1930s.
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A steep slide in the last 90 minutes of the trading session pushed the benchmark Standard & Poor’s 500 index to its lowest level since March and drove the Dow Jones industrial average down nearly 240 points.
“It almost seems like we had capitulation in the last hour of the day,” said Anthony Conroy, head trader in equities for BNY ConvergEx Group in New York.
He cited rumors circulating all day that Countrywide Financial, the biggest purveyor of subprime mortgages, was about to file for bankruptcy protection. The company said there was “no substance” to the rumors.
Nonetheless, “toward the end of the day, everything came in for sale, and the financials were leading the way,” Conroy said.
Even defensive Dow components that closed higher during the session, including drug giant Merck and tobacco marketer Altria Group, lost ground in the final 90 minutes.
The Dow tumbled 238.42 points, or 1.9 percent, to 12,598.07. The Dow stands 11 percent below its record high of 14,164 three months ago, making this setback a “correction,” the term for a decline of 10 percent or more. For 2008 so far, the Dow and the S&P 500 are down more than 5 percent.
Historic market patterns indicate that if the results of the first five trading days of the new year are positive, the market is almost always up for the year, according to the Stock Trader’s Almanac. When the first five days end in a loss, chances of a positive year diminish to about 50 percent.
Technology stocks, which were supposed to be a safe haven from credit worries and the housing slump, have performed worse than financial stocks so far this year, as investors grew cautious about the prospect for economic growth and business spending.
The Standard & Poor’s index of major information technology stocks has dropped 10 percent this year. The S&P index of financial-services stocks is off 9 percent. Of the 10 major S&P stock sectors, just two, utilities and health care, were in the black for the first five days of trading in 2008.
Market analysts watching the latest slide cited the Countrywide bankruptcy rumor, plus a downbeat sales outlook by AT&T. Randall Stephenson, chief executive of the phone giant, told an investor conference, “We’re experiencing softness on the consumer side of the house from the economy.”
Shares of Countrywide plummeted $2.17, or more than 28 percent, to $5.47, the largest decline in more than 20 years, according to Bloomberg News. AT&T stock dropped $1.87, or nearly 5 percent, to $39.16, the biggest drop in almost five years, according to Bloomberg.
Meanwhile, the investor flight to safety lifted the price of gold to a record high in futures trading. Gold for February delivery gained $18.30 an ounce, to $880.30.
Treasury securities closed higher, trimming interest rates, though the gain was limited by conflicting opinions by Fed officials about the outlook for the economy and the need for further cuts in interest rates by the central bank.
Essentially, investors are lowering their sights for the 2008 outlook, said James McDonald, director of equity research at Northern Trust.
“Since the beginning of December, there has been an increasing concern in the market about economic growth,” he said.
“Everyone has been expecting that economic growth was going to slow in the fourth and first quarter and even the second quarter. We are now getting information that that is happening. The new surmise is that it could be worse.”
Fourth-quarter earnings reports and outlooks, especially by financial-services companies, are the principal focus for investors in the weeks ahead, analysts said.
“Everybody is waiting on the sidelines, knowing that there is another shoe to drop and waiting for that shoe to drop before betting into the market,” said Conroy.
The disclosures of credit-related losses at banks and other financial institutions still are unfolding, as investors wait for the extent of the damage to be known. “That’s not going to happen in the first quarter of this year,” said McDonald.
The spotlight on the coming round of quarterly reports has been evident in the share price of Alcoa, the aluminum producer that on Wednesday is scheduled to be the first of the 30 Dow companies to report fourth-quarter results.
Aloca shares dropped $2.11, or 6.4 percent, to $31, the steepest percentage drop in the Dow, even though aluminum ingot prices have staged a rally.
Indeed, industrial metals, including copper, have advanced in futures trading, as analysts see no major letdown in global demand for basic materials.
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“International growth remains reasonably good in Europe and Asia,” said McDonald.
So far this year, the benchmark Europe-Far East index and the Emerging Markets index, both compiled by Morgan Stanley Capital International, are lower but have outperformed the major U.S. stock indexes.
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