The Dow Jones Industrial Average plummeted 512 points on Thursday as the European debt crisis spread to Italy and Spain and the US seemed on the verge of falling back into recession. It was the single worst day for stocks since October of 2008. All three major indexes fell by more than 4 percent, with the Dow off 4.31 percent, the Nasdaq down 5.08 percent and Standard & Poor’s down 4.78 percent, in the biggest percentage drop since 2009.
The US stock market is now in a “correction,” having dropped 10 to 20 percent after its last peak. In the New York Times, Sam Stovall, chief investment strategist at Standard & Poor’s, said that “We could have another couple of weeks to go before it bottoms.” The market was last in a correction in the summer of 2010 when it fell 16 points before it recovered.
In Asia, markets have already started to fall on Friday. Japan’s Nikkei 225 was down by 3.6 percent within 30 minutes of opening in Tokyo. The Japanese government has intervened to weaken its yen while the European Central Bank has started buying bonds in an effort to calm the market.
On Wednesday, rather than taking serious action to address Italy’s growing debt crisis — the country’s debt is 120 percent of its GDP, the second largest in the euro zone after Greece — Prime Minister Silvio Berlusconi said that current measures were sufficient to sustain growth. On Thursday, European Commission President Jose Manuel Barroso warned that, despite a second bailout of Greece and bailouts of Portugal and Ireland, the eurozone’s sovereign debt crisis was spreading to Spain and, indeed, Italy.
On CNN, Bob Doll, chief equity strategist at the world’s largest money manager, BlackRock, said there is “total fear” in the markets. Adding to the pressure is anticipation of Friday’s job report: CNN Money analysts predict the report will show the US economy created 75,000 jobs in July. That’s far more than the 18,000 net new jobs created in June, but still short of the 100,000 jobs needed to keep the unemployment rate — currently at 9.2 percent — from rising.
The US could well be headed for a double-dip recession, a situation that last occurred 30 years ago, writes Floyd Norris in the New York Times. The political consensus in “Great Recession I” was to stimulate the economy. But “Great Recession II” follows on the heels of protracted Congressional “squabbling” that produced a bill calling for reductions in spending over the next decade. Can President Obama — described now as “capitulating” to Republicans and surrendering — and Congress — whose disapproval rating is at a record 82 percent — overcome partisan divisions to take action, create jobs and stabilize the economy?
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Image of the Dow falling 450 points in September of 2008 by YoTuT