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Stocks Fall More Than 2% on Recovery Worries

Published: Wednesday, 11 Aug 2010 | 4:55 PM ET

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By: Abby Schultz
Special to CNBC.com

Stocks tumbled Wednesday on light volume as investors lost confidence in the global economic recovery following the Federal Reserve's grimmer outlook and softening growth in China.

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

The Dow Jones Industrial Average fell 265.4 points, or 2.5 percent, to 10,378.83, its worst percentage drop in nearly a month.

All 30 Dow components were lower, led by Alcoa [AA Loading... () ], Boeing [BA Loading... () ] and Caterpillar [CAT Loading... () ].

Ninety-nine percent of S&P 500 stocks were down, with the index falling 31.6 points, or 2.8 percent, to 1,089.47.

The Nasdaq tumbled 68.5 points, or 3 percent to 2,208.63, led by semiconductor stocks.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 13 percent, topping 25.

The Federal Reserve's decision to continue purchases of government securities, coupled with its downward outlook for the economy, rattled the market. But Robert Weissenstein, chief investment officer at Credit Suisse Private Banking Americas, said on CNBC that it's actually a good sign — that the Fed is simply being careful to keep the recovery on track.

And right now, he says, the market is being "underplayed."

"If earnings continue at the rate they’re going, and even if they come in lower than where expectations are, the equity markets are cheap," Weissenstein said. "People have priced in a pretty awful outcome."

FOR INVESTORS

All of 10 key S&P sectors were lower, led by industrials, financials and materials.

The stock market's slide followed sharp losses in Europe and Japan. The dollar slid to a 15-year low versus the yen, while the euro fell 2 percent against the dollar.

Market strategists said the sell-off may be due to light volume and technical factors, in that stocks have traded within a range for quite some time and the market was simply at the top of its range with no news to send it higher.

"You need a catalyst to pierce through on the high end of the range," said Linda Duessel, equity market strategist at Federated Investors.

Duessel said the strong earnings season should have been enough the propel the market higher, but it didn't.

"We’re filled with fear and uncertainty and we’re all on vacation anyway and we’re not trading," Duessel said.

Volume on the New York Stock Exchange has been below 1 billion shares. When there are more participants, the market is less reactive. "Here, it assumes a life of its own," said Doug Roberts, Chief Investment Strategist for Channel Capital Research.

Markets were lower across-the-board, but certain sectors were hit harder. Shares of large-cap companies with significant international exposure were suffering on worries over global economic weakness, including Caterpillar and DuPont [DFT Loading... () ].

Financials were mostly in the red, led by the large banks such as Bank of America [BAC Loading... () ], Citigroup [C Loading... () ] and JPMorgan [JPM Loading... () ], which all fell more than 2 percent. Bank of America was trading at a 52-week low.

Meanwhile, Macy's [M Loading... () ] jumped more than 5 percent after the department-store chain reported better-than-expected results and raised its outlook. S&P Equity raised its price target on the retailer to $25 from $22.

In other retail news, Gap [GPS Loading... () ] fell after Wedbush Securities downgraded its rating on the stock to "neutral" from "outperform," saying the retailer is failing to hold on to shoppers.

Walt Disney [DIS Loading... () ] was lower, even though the entertainment giant reported higher profit and sales that beat estimates, thanks to a boost from sports network ESPN and a turnaround at its movie studio. Theme park attendance, however, was down domestically.

Nestle reported positive results and raised its outlook for the year based on strong demand for its products in emerging markets. The Swiss food company said sales in its foods and beverages business should grow 5 percent, better than earlier expectations.

Results from networking-gear maker Cisco Systems [CSCO Loading... () ] were due after the bell.

Dell [DELL Loading... () ] dropped more than 3 percent ahead of the computer maker's plans later this week to sell a tablet to compete with Apple's [AAPL Loading... () ] iPad. The Dell "Streak," as it's called, is a five-inch tablet that will run on Google's [GOOG Loading... () ] Android operating system.

Research In Motion [RIMM Loading... ()] is dealing with another foreign government with security concerns: India said it may shut down Blackberry's services temporarily. The news comes a day after the company agreed to let the Saudi government monitor the Blackberry Messenger.

AIG [AIG Loading... ()] shared tumbled almost 5 percent after the insurance giant said it is selling an 80 percent stake in its consumer credit business, American General Finance, to hedge fund manager Fortress Investment Group as it continues to sell off assets to repay taxpayers.

And Genzyme [GENZ Loading... () ], the target of a takeover bid by France's Sanofi Aventis [SNY Loading... () ], said its newly disclosed disposal of batches of drugs stemmed from one-time quality control issues, and was not related to deeper manufacturing problems.

Earlier, China reported that the pace of growth investment and factory output slowed in July, raising worries about the outlook for Chinese domestic growth, which has been expected to drive the global recovery. Retail sales in China were also softer than expected.

And in U.S. economic news, the trade deficit widened more than expected in June amid a surge of consumer goods from China and other suppliers, while U.S. exports fell, a government report showed on Wednesday.

Mortgage purchase and refinancing applications, meanwhile, rose by less than 1 percent in the first week of August, even as 30-year loan rates fell to 4.57 percent, the lowest in 20 years of record keeping by the Mortgage Bankers Association.

Treasury prices remained higher following strong demand for the government's 10-year auction, which had a high yield of 2.73 percent and a bid-to-cover of 3.04.

The 30-year bond auction is slated for Thursday.

Also, the International Energy Agency warned fuel consumption may decline if the global economy sinks. Oil slid below $79 a barrel following the news.

Ahead This Week:

WEDNESDAY: Earnings after the bell from Cisco
THURSDAY: Dell's annual meeting, jobless claims, import and export prices, 30-year bond auction; Earnings before the bell from Kohl's and after the bell from Nordstrom and Nvidia
FRIDAY: CPI, retail sales, consumer sentiment, business inventories; Earnings before the bell from JCPenney

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