With the reality of the impact that the financial crisis will have on the economy starting to hit home, it’s beginning to look like Monday’s record-breaking rise on Wall Street was a false sense of hope:
Wall Street looked beyond the government’s bailout plan on Wednesday and saw more signs that the economy was in for a slowdown.
And investors sold.
At the close, the Dow Jones industrial average was down 733.08 points, or 7.8 percent, erasing most of Monday’s 936-point gain. The broader Standard & Poor’s 500-stock index was down 9.03 percent. The technology-heavy Nasdaq was down 8.4 percent, after the chip maker Intel reported a profit for the quarter but noted that sales of chips used in corporate computers were weaker than expected.
“I believe this is the sound that hedge funds make when they are imploding,” T.J. Marta, a fixed income strategist at RBC Capital Markets, said, characterizing the sell-off in the last hour.
Analysts said the market was continuing reaction to the same fundamental factors that drove it lower in the morning, including weakness in the manufacturing sector, the large drop in retail sales, and the growing realization that there will be no quick fix to the credit crisis.
The decline came as news broke that retail sales had slumped badly in September, and after Fed Chairman Ben Bernanke made it plain that it will take time for the bailout to have any impact at all:
The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that the American economy was headed toward an extended period of difficulty, despite worldwide efforts to stabilize the financial markets.
But he said federal officials had armed themselves with “the tools we need to respond with the necessary force to these challenges.”
“Broader economic recovery will not happen right away,” Mr. Bernanke said in a speech to the Economic Club of New York, even if financial markets stabilize “as we hope they will.”
But he said that “Americans can be confident that every resource is being brought to bear to address the current crisis.”
Mr. Bernanke, in his remarks, said that because of the worldwide downturn, “our export sales, which have been a source of strength, very probably will slow.”
The labor, housing and credit markets would also take time to recover, he said, and consumer spending and business investment remained weak.
Inflation, however, appeared to have “held steady or eased,” Mr. Bernanke said, citing the sharp drop in oil prices in the last few weeks. He said that stable prices, coupled with the broader downturn, would probably keep inflation in check, offsetting other problems.
“Although much work remains and more difficulties surely lie ahead,” Mr. Bernanke said, “I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.”
He added that, “ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.”
Translation — there are tough times ahead, and Wall Street reacted by basically ending up in the same position it was at the end of last week:
Like I keep saying, this isn’t over yet folks.
I gues Mayer Amschel Rothschild was right “Give me control over a nation’s currency, and I care not who makes its laws.”
deposits and despots.