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Stocks plummet amid fear for worst

Recession coming? The market has third big decline since July.

By Los Angeles Times
Published January 5, 2008

Will the third time be a charm - or a bust?

The stock market, slammed Friday by recession fears, is suffering through its third major decline since July. Key indexes closed either near or below their levels in November, which marked the bottom of the second sell-off.

The Dow Jones industrial average sank 256.54 points, or nearly 2 percent, to 12,800.18. That left it 0.4 percent above its low of 12,743.44 reached Nov. 26.

The Russell 2000 small-stock index dropped to a 15-month low, barreling through its Nov. 26 nadir of 735.07 to finish at 721.60. It was down 23.41 points, or 3.1 percent, for the day.

The Nasdaq composite index, dominated by technology shares, plunged 98.03 points, or 3.8 percent, to 2,504.65, below its Nov. 26 close of 2,541. It was the index's biggest one-day percentage drop since Feb. 27.

Stocks plunged in August as the housing and mortgage markets' woes deepened, then rebounded sharply in September after the Federal Reserve began cutting interest rates.

The Dow reached a record high of 14,164.53 on Oct. 9.

The market dived again in October and November, then resurged for several weeks as the Fed and other central banks took fresh steps to ease the global credit crunch. The net result was that many investors were rewarded for buying into the last two market sell-offs, at least if they bought after the Dow fell below 13,000.

This time? Some analysts warn that the difference is that the economy appears much more at risk of sliding into recession than it did in August or November.

"There's no question that the fundamentals today are a lot worse" than during the previous two market sell-offs, said Peter Boockvar, equity strategist at investment company Miller Tabak & Co. in New York.

The government said the economy created a net 18,000 new jobs in December, the weakest growth in four years. On Wednesday, the Institute for Supply Management said its index of U.S. manufacturing suggested a contraction in activity in December. It was the index's weakest reading since April 2003.

Many investors who have remained bullish in recent months have cited surprising strength in job creation and continued growth in the manufacturing sector. Those factors would provide support for the economy and thus for corporate earnings and share prices, optimists said.

With those pillars eroding, investors should be cautious about jumping into the market now - even though "buying the dips" worked well in August and in November, said Doug Cliggott, chief investment officer at Dover Management in Greenwich, Conn.

"I think you should (be) as defensive as all get out," he said.

He favors sectors such as utilities, whose earnings would be expected to hold up even if the economy weakens further.

Some money managers said they still were betting on a continuing economic expansion, albeit at a slower pace.

"We think the U.S. misses recession," said Michelle Clayman, chief investment officer at New Amsterdam Partners in New York.

[Last modified January 4, 2008, 22:47:40]