Wall Street's whiplash-inducing volatility shows no signs of letting up.
Share prices plunged Thursday on fears of widening credit market woes stemming from growing defaults on sub-prime mortgages. The Dow industrials sank 387 points, their biggest drop since February.
The slide was triggered after a major French bank blocked investors from pulling money from three funds that had invested in securities backed by U.S. sub-prime mortgages. The bank, BNP Paribas, said "the complete evaporation of liquidity in certain market segments" made it impossible to accurately value the funds' assets.
In moves to soothe investors, the Federal Reserve and the European Central Bank injected billions of dollars each into their banking systems, but those moves only added to the angst.
European stock markets tumbled, and Wall Street followed suit with an even sharper decline.
The U.S. stock slide -- on the heels of three days of gains -- reflected uncertainty about how much economic damage will be done by the sub-prime mortgage market. The fear is that a broad, long-lasting credit market crunch could hurt corporate profits and lead to a recession.
The sell-off, which hit financial and retail stocks especially hard, continued an erratic pattern of triple-digit-point moves in the Dow since the industrials reached a record close just above 14,000 on July 19. On 11 of the 15 trading days since then, the index has gone up or down at least 100 points.
The Dow had climbed 475 points from Monday through Wednesday as the bond market showed signs of stabilization, but Thursday's reversal wiped out four-fifths of that advance.
Some portfolio managers pinned the volatility on hedge funds, which often trade rapidly based on computer programs and leverage their holdings through borrowing.
"When you're that highly leveraged, the day is going to come when your mathematical model doesn't work, and then you're in trouble," said Don Hodges, manager of the Hodges Fund, a Dallas-based stock mutual fund. "I've seen a lot of these corrections in 48 years in this business, but this is the first one where the hedge funds are in such control of the nut house."
Hodges called the decline an overreaction and said the extreme volatility could continue.
Frank Glaser, a retiree in Palos Verdes who sold stocks in fear at the bottom of the bear market of 2000-02, spent the last five years rebuilding his portfolio.
"The volatility is terrifying to a lot of people, but we've been here before," Glaser said. "We are watching this with great interest but no panic."
In Thursday's session, 29 of the Dow's 30 stocks -- all but General Motors -- lost ground.
The Dow sank 387.18 points, or 2.8%, to 13,270.68. The broader Standard & Poor's 500 index fell 44.40 points, or 3%, to 1,453.09. The technology-heavy Nasdaq composite index slipped 56.49 points, or 2.2%, to 2,556.49.
Declining issues outnumbered advancers by 4 to 1 on the New York Stock Exchange.
Yields on U.S. government bonds fell sharply as investors sought the relative safety of Treasury securities. The benchmark 10-year T-note plummeted to 4.77% from 4.85% late Wednesday. Yields on riskier bonds rose, with the average yield on an index of 100 junk bonds tracked by KDP Investment Advisors Inc. climbing to 8.37% from 8.32%.
"We've seen a realization that there's a default risk in anything but Treasury securities," said Ron Muhlenkamp, manager of the Muhlenkamp Fund, a Pittsburgh-based mutual fund.
He said BNP's announcement -- which echoed recent moves by some U.S. hedge fund operators that have cut off withdrawals -- spooked investors who feared they might not have access to capital in a pinch.
Retail stocks fell after chains released July sales figures that on balance painted a bleak picture of U.S. economic strength, adding to concerns that housing and mortgage problems could hit retailers especially hard by reducing consumer spending.
Home Depot, citing volatility in the stock, debt and housing markets, said the sale of its wholesale business might bring in less than expected. The company, which also scaled back its stock repurchase plans, saw its shares dive $2.01, or 5%, to $35.79, the biggest decline in the Dow.
Among other retailers, Pacific Sunwear of California shed $1.90 to $15.33 after reporting a drop in sales at stores open at least a year. Weak reports also hurt American Eagle Outfitters, off $1.44 to $22.40; Dollar Tree Stores, down $3.17 to $39.28; and Family Dollar Stores, down $3.74 to $26.64.
Slumping financial stocks included Goldman Sachs Group after a second Goldman-managed hedge fund was forced by losses to sell positions. Goldman shares sank $11.05 to $182.25.
Morgan Stanley fell $3.58 to $61.81, while JPMorgan Chase dropped $2.34 to $44.17.
Despite the latest wave of fear in credit markets, most home builder stocks rose. KB Home gained 21 cents to $36.18 and Ryland Group rose 97 cents to $38.44.
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