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NEW YORK — A new bout of fear gripped the financial markets on Thursday and stocks fell sharply for a second day, continuing a months-long plunge that has wiped out the gains of the last decade.
The credit markets seized up as confidence in the nation's financial system ebbed. Investors were so eager to move money into ultrasafe U.S. Treasury debt Thursday that they were effectively paying the government to hold on to their money.
Some markets are now back to where they were before Congress approved the $700-billion financial rescue in October. The Dow Jones industrial average fell 445 points, to 7,552.29, and the S&P 500 index fell 6.7 percent.
Laid-off workers' new claims for jobless aid reached a 16-year high, and the number of Americans searching for work surged past 10-million.
With Thursday's stock rout, $8.3-trillion in stock-market wealth has been erased in the last 13 months. The broad market sank to its lowest level since 1997 — before the dot-com boom, the Nasdaq market bust and the ensuing bull market that drove stocks to record heights.
Investors were petrified. Rates on all types of U.S. government debt fell to all-time lows. The Treasury can now borrow money for two years at a rate of less than 1 percent, and can borrow money for 30 years for less than 3.5 percent.
For 30-day Treasury bills, the rate is effectively zero, which means that with transaction fees, investors are essentially paying for the government to take money out of their hands for a month.
Investors are growing increasingly worried that big banks like Citigroup, JPMorgan Chase and Bank of America, which have all received billions of dollars from the government to bolster their finances, are still too weak. The price of Citigroup's shares plunged 26.4 percent on Thursday, and other financial shares fell to fresh bear-market lows.
"This is a response to real fear," said Marc Stern, chief investment officer at Bessemer Trust, an investment firm in New York. "We each have to look inside and say, is the fear warranted?"
The selloff gathered force over the last several days and brought an abrupt end to what had been a modest improvement in financial markets. After the Federal Reserve began making short-term loans directly to businesses last month, a semblance of normalcy had returned to credit markets, and the stock market, although volatile, had held above its old lows.
As Congress prepared to leave town there was no such resolution on helping the auto industry, a disaster in the making that could lead to hundreds of thousands if not millions of additional lost jobs.
More bad economic news arrived Thursday morning when the Labor Department reported that new claims for unemployment benefits rose to a seasonally adjusted 542,000 last week, the highest level since July 1992.
Unemployment is also climbing at a rapid clip in Europe, and the once-sizzling economies in Asia and Latin America are starting to sputter. Early today, Singapore reported that its third-quarter gross domestic product fell at a 6.8 percent annualized pace.
In early Asian trading today, stocks were down nearly 3 percent in Japan, Australia and New Zealand. On Thursday, most European markets closed down more than 3 percent for the day.
The global nature of the slowdown is one of the reasons that oil prices have fallen spectacularly in recent months. On Thursday, oil futures, which had touched $145 this summer, closed below $50 a barrel for the first time since 2005, settling at $49.62 a barrel, down 7 percent.
The selloff in markets has been all the more severe because of forced selling by hedge funds, mutual funds, insurance companies and banks, all of which are being compelled to sell at the same time because of pressures from investors, lenders, regulators and rising insurance claims.
There have been spectacular declines in investments like commercial mortgage-backed securities, which are collections of loans backed by shopping malls, office buildings and apartments.
"Where the credit markets are trading, it's all but implying a 1929 scenario," said Joe Balestrino, a strategist at Federated Investors.
In a tiny piece of good news, Fannie Mae and Freddie Mac announced that they are temporarily suspending foreclosures and evictions during the holiday season in an effort to keep people from losing their homes.
[Last modified: Nov 21, 2008 12:16 AM]
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