Wall Street hit levels not seen since 2003 as the fate of Detroit's Big Three automakers and the economy disheartened investors.
NEW YORK — Wall Street hit levels not seen since 2003, with the Dow Jones industrial average falling below the 8,000 mark, as the fate of Detroit’s Big Three automakers and the economy disheartened investors.
Investors were also discouraged by the Federal Reserve’s sharply lowered projection for economic activity this year and next. Economic worries caused across-the-board selling, with financial stocks particularly hard hit.
At the close, the Dow was down 427.47, or 5.1 percent, at 7,997.28.
In the broader market, the Standard & Poor’s 500 index fell 52.54, or 6.1 percent, to 806.58, and the Nasdaq composite index fell 96.85, or 6.5 percent, to 1,386.42.
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Investors vacillated in early trading as they tried to hold on to gains achieved in the previous session, but gave way as the nation’s top three automakers pleaded for relief during a second day of hearings in Washington, D.C.
Investors are concerned about the repercussions should General Motors, Ford or Chrysler collapse — an event that could ripple through an already battered economy. The heads of those companies today appeared before lawmakers to argue for a massive infusion of cash to prevent millions of layoffs, stave off bankruptcy and stabilize the companies.
“There’s a general malaise among investors right now,” said James Cox, managing partner of Harris Financial Group. “Everybody is in wait-and-see mode of what is going to happen with these Big Three automakers.”
At the same time, investors were discouraged by the Federal Reserve’s sharply lowered projection for economic activity this year and next. In the minutes from its last rate-setting meeting in October released today, the Fed signaled additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.
The Fed predicts that with the economy forecast to lose traction or maybe jolt into reverse, unemployment will move higher.
Reports on consumer prices and new-home construction released by the government earlier in the day provided more evidence that the economy remains in flux.
According to the Labor Department’s Consumer Price Index, consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount. While lower prices might be good for the consumer, they can hurt corporate profits. Lower prices also raise the threat of deflation, a prolonged bout of falling prices.
Meanwhile, a government report on the housing sector showed that the industry’s severe correction continues. The Commerce Department reported that construction of new homes plunged 4.5 percent last month to the lowest level on government records.
Stocks have been trading erratically for several weeks as investors try to gauge the direction of the economy. Analysts expect the volatility to continue for some time while the market recovers from the steep losses logged in October.
However, investors are continually faced with a barrage of bleak economic news, which has stymied any meaningful gains in the market.
“The market’s inability to break out in either direction is causing a lot of prolonged anguish in the marketplace,” said Peter Cardillo, chief market economist at Avalon Partners.
Many economists believe the economy has fallen into a recession that could be the worst downturn in more than two decades. The expectation is that easing inflation pressures will give the Federal Reserve room to cut interest rates further to combat the downturn. But investors seemed to have found little consolation in the potential for an additional rate cut.
While Cardillo expects the Fed to cut interest rates again, he said it is becoming more difficult for the cuts to have an effect on the market.
“Remember that rates are so low that they are running out of ammunition,” he said.
Light, sweet crude for December delivery fell 77 cents to settle at $53.62 a barrel on the New York Mercantile Exchange, about where prices were in January of 2007.
In Asian trading, Japan’s Nikkei index fell 0.7 percent, and Hong Kong’s Hang Seng index fell 0.8 percent. In European trading, Britain’s FTSE 100 fell 4.8 percent, Germany’s DAX index fell 4.9 percent, and France’s CAC-40 fell 4 percent.