U.S. stocks ended sharply lower on renewed fears about credit markets and global liquidity.
"The message of the markets today is that the credit problem is significantly more than what was being forecast or expected by private sector economists and the Federal Reserve," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "This sharp decline is very scary. It is really, really tense and there is a lot at stake."
The Dow Jones Industrial Average fell 387 points, or 2.8%, the third one-day decline of 300 points or more so far this year. It was the worst daily performance for the blue-chip index this year since Feb. 27, when the Dow fell 416 points. The S&P 500 dropped 3.0% and the Nasdaq Composite ended down 2.2%.
The Dow remains up 6.5% for the year, the Nasdaq is up 5.9% while the S&P 500 has lagged with a year-to-date gain of 2.5%.
Thursday's selloff was broad-based, with all 10 economic sectors tracked by S&P closing lower. Breadth was negative with decliners outpacing gainers by nearly four to one on the New York Stock Exchange, which saw record trading volume of 2.8 billion shares.
Financial stocks were notably weak following three days of gains. Renewed selling hit investment banking stocks such as Bear Stearns and Goldman Sachs, both of which have suffered losses in hedge fund investments.
"What you are seeing in the market is the brokers that have lent money to hedge funds are demanding more collateral and are seizing assets," said Peter Boockvar, equity strategist at Miller Tabak.
"What you want to find out is who has the most exposure to the credit derivative markets," said Arthur Hogan, managing director at Jefferies. "We don't know exactly how much damage has been done and how much follow-through there will be from subprime up the credit ladder."
Goldman Sachs recently liquidated positions in its widely known internal fund Global Alpha as well as its North American Equity Opportunities hedge fund in order to curb its risk profile, according to the Wall Street Journal.
Troubles at the Goldman hedge funds added to investor anxiety initially triggered by news of a freeze on redemptions at three French hedge funds operated by BNP Paribas. The French bank froze funds with about $2.2 billion in assets saying the lack of liquidity in the U.S. mortgage market made it impossible to value the funds fairly.
"I think this is the Hindenburg," said Peter Schiff, president of Euro Pacific Capital. "We've got all of this bad mortgage paper all around the world and it's going to get worst."
"Investors are like deer in the headlights," said David Dietz, chief investment strategist at Point View Financial Services. "Those initial hopes going back a couple of months that the subprime crisis could be contained in terms of asset class and geographically are completely off the table. As a result, investors are left scratching their heads."
Monetary officials were quick to address the situation on Thursday.
The European Central Bank injected nearly 95 billion euros ($131 billion) into money markets to try to relieve credit jitters. Following the ECB action, the Federal Reserve carried out a $12 billion one-day repurchase agreement, in addition to a previous $12 billion 14-day repo.
Federal funds futures now signal a 100% chance of an interest rate cut from the FOMC in September. Yields on Treasury bonds sank across the board as investors sought the safety in government-backed assets.
Home Depot was the biggest loser on the Dow, dropping more than 4%, after the home improvement retailers said a deal to sell its supply unit was being renegotiated and that could result in a lower price than the previously announced $10.3 billion. Home Depot also lowered its price range for a tender offer to repurchase its stock.
Dow component American International Group reported second-quarter net income that beat analyst expectations. AIG said income jumped 34% due to strength in the company's property and casualty and domestic life insurance businesses. However, AIG also reported a $78 million loss in its mortgage guaranty business due to weakness in the U.S. housing market.
Retail sales for July from most companies did not help lift enthusiasm.
Ann Taylor said sales at stores open at least a year fell 5% in July due to weakness at its LOFT chain. Analysts were expecting the company's same-store sales to fall 3.3%, according to Reuters Estimates.
American Eagle Outfitters posted an unexpected 6% decline in July, but reaffirmed its second-quarter profit outlook.
Costco bucked the trend and reported a 7% rise in same-store sales in July, beating the consensus estimate of 5.5% from analysts surveyed by Thomson Financial.
New York light sweet crude futures pared losses to trade just under $72 a barrel after natural gas inventories rose less than expected.
In economic news, the number of people claiming unemployment benefits for the first time rose by 7,000 to 316,000 for the week ended Aug. 4. That was more than the 4,000 increase economists were anticipating.
Deals were back in vogue despite the tight lending market as Blockbuster announced it bought Movielink, an internet-based film service, to boost its online presence.
European Stocks Close Sharply Lower
European stocks closed sharply lower after French bank BNP Paribas said it was suspending subscription and redemption of three funds because of the turmoil in the U.S. subprime mortgage market.
The yield on the German 10-Year bund fell 20 points shortly after the announcement as investors sought safe-haven positions, and the dollar fell sharply against the yen.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all finished with triple-digit losses.
Shares of Germany's Commerzbank also tumbled as the Frankfurt-listed bank sought to ease investors' fears over U.S. mortgage effects by saying it was on course to beat its profit expectations for the year.
In other earnings reports, shares of Deutsche Telekom gained afterthe German telecom company beat analysts' expectations with 1.8% gain in second-quarter core earnings, as it gained customers abroad.
Asian Markets End Mostly Higher
Asian markets continued their advance in the afternoon session Thursday with regional shares reaching their highest in more than a week. Australia, Japan and South Korea all closed with gains.
A fall in the yen further propelled Japanese exporters such as Canon. The Federal Reserve's positive outlook on the U.S. economy this week helped whet appetite for riskier assets, weighing on the low-yielding Japanese currency, a favorite vehicle for carry trades. In carry trades, investors borrow in low-interest rate currencies, such as the yen, to invest in higher-yielding, riskier assets.
Tokyo's Nikkei 225 Average finished at its highest in over a week as Fast Retailing jumped on news that its bid for retail chain Barneys New York may fail, while TDK and other exporters gained on Wall Street and a softer yen.
South Korean shares ended higher as gains in key technology shares helped the market absorb the impact of an unexpected interest rate increase by the Bank of Korea. Samsung Electronics and LG.Philips LCD both advanced.
Hong Kong stocks fell, with the Hang Seng Index in negative territory, but financial plays rose, with China Merchants Bank out in front before its earnings report due later in the day. Shipping conglomerate COSCO rose nearly 9% at one point in heavy trade following a broker upgrade.
China's Shanghai Composite Index climbed nearly 2% to a fresh record high as financial shares surged while steel and base metals recovered from Wednesday's tumble.