Stocks got planted Thursday as panic took hold over investors worried the world edged closer to recession because of continued problems in the European banking system.
Carolyn Frzop, first vice president of Janney Montgomery Scott, said investors are concerned European’s are about to have their “Lehman Brothers moment,” as key banks struggle over debt issues related to government bonds.
Shares plunged at the opening and like the Cubs kept losing into the afternoon. The Dow was down finished down mroe than 415 points, the Nasdaq was off 130 and the S&P had shed 53. Gold surged to a record.
Paul Schatz, president of investment advisory Heritage Capital, said Thursday’s big drop was the global recession being priced into stocks.”
He added the market was spooked on news that Federal Reserve officials were meeting with the U.S. executives of European banks.
The Wall Street Journal reported this morning that the Fed is concerned European banks will use their U.S. divisions like piggy banks to refinance debt in Europe. The banks on the other side of the Atlantic are having trouble attracting new money as investors worry that some banks’ stakes in the most debt-ridden European countries are too high.
Meanwhile, Amit Khandwala, co-chief investment officer of Milford-based Wright Investors’ Service, said disappointing news from the Philly Fed and the CPI kept shares in the negative.
The Federal Reserve Bank of Philadelphia reported Thursday its factory index had fallen to negative 30, which indicates the sector is contracting. Meanwhile, the Bureau of Labor Statistics reported Consumer Prices in the nation jumped 3.6 percent in July despite a weak employment market.
This adds more fear to the market given recent reports that consumer borrowing increased, which now might be taken as a sign for economic weakness. Increased consumer borrowing can indicate families are confident in the economy and are willing to take on more debt, but given the current job situation and rising costs, it might also mean families have had to turn to credit to pay bills.
John Gerlach, an associate professor of Economics and Finance at Sacred Heart University, said Thursday’s sell off felt different than last week, becuase “last weak it was fear, this was a panic.”
But Gerlach and others pointed out all the activity and fear on Thursday doesn’t mean the recession is here and Friday is a new day.
This time, when the banks fail again, and we bail them out again (because we MUST, you see ;) before any money actually goes out or is voted on, government must temporarily take over the banks, fire all those at the top, and more or less start over with new REGULATIONS. Just take out the too big to allow banks. Problem: The Fed is uncontrollable.