Stocks Dive to Close Brutal Week; Many Believe Global Recession is Likely

It was a dramatic, fractious day on the Street, with the Dow Jones industrials falling more than 500 points soon after trading began and, following the pattern of recent sessions, recovering ground only to fall sharply again. They ended the day with a loss of 312.

The pullback on Wall Street wasn't as steep as some observers had feared after stocks plunged overseas in response to another round of grim corporate news.

The Dow fell 312.30 points, or 3.6%, to close at 8,378.95. Still, the blue chips remained above the 8,000 level; at its recent low of Oct. 10, the Dow traded as low as 7,882.51.

The Standard & Poor's 500 index dropped 31.34, or 3.5%, to 876.77 and the Nasdaq compostie index fell 51.88, or 3.2%, to 1,552.03.

Friday's finish was the lowest for the Dow since April 25, 2003, when it ended at 8,306.35. For the S&P, it was the lowest ending since April 11, 2003 when the index finished at 868.30.

For the week, the Dow fell 5.35%, the S&P 500 lost 6.78% and the Nasdaq fell 9.31%.

Diving stock prices are being driven by emotion and fear in a bear market that just seems to get worse, says Andy Brooks, head trader at mutual fund giant T. Rowe Price.

"It is pretty serious," says Brooks. "Stocks around the globe are down 9%." Stocks fell 9.6% in Tokyo, 8.3% in Hong Kong and were down only slightly less in major European markets.

The Dow, which was 550 points below Thursday's close in futures trading before the opening bell, seemed to be holding up fairly well, considering the steeps drops around the world.

Another bright spot is that both the Dow and the broader Standard & Poor's 500 index are still trading above their intra-day lows -- 7773 for the Dow and 839.80 for the S&P -- hit during the panic-led sell-off on Friday Oct. 10.

Much of the selling has been driven by global deleveraging, a process in which investors sell securities to reduce risk and lower their exposure to financial markets.

Investors are still unsure how far along in the deleveraging process we are. It is made worse because many big investors, such as hedge funds, were invested with borrowed money, which amplifies losses.

As is often the case when stocks drop precipitously, investors are hoping Friday's drop marks the final day of capitulation -- a day when all the panicky investors who want to get out finally sell, and get out, says Brooks. That type of selling has paved the way for market bottoms and recoveries in past bear markets.

"The key to the day will be to see some real emotional selling," says Brooks. "Everyone wants the throw-in-the-kitchen-sink-type trading day. That would be healthy. There is some real panic and emotion and that often signifies a capitulation."

With the Dow now down more than 41% from its Oct. 9, 2007, high, some investors say this is the time to buy, but only if investors have the stomach to deal with crazy volatility and have a long time horizon.

Stock prices, says Brooks, already reflect a pretty bad economy.

Stocks in the S&P 500 are currently selling at less than 10 times their earnings projections for 2009. That is close to the bottom of the 1973-74 bear market, when the index average bottomed at seven times earnings. Stocks are already selling at lower valuations than they were after the 1987 stock market crash.

Todd Leone, head trader at Cowen & Co., says Wall Street is nervous, and "bracing for the worst" as the trading day moves forward Friday.

But, Leone says, investors are "hoping that we get selling capitulation and that we bounce back."

Despite all the fear, Leone says many stocks are good buys, after having being beaten down the past year.

Much of the selling is by investors who can no longer cope with the violent price swings and steep losses, Leone says. "People are just getting out," he says.

Selling is also being driven by hedge funds, or private investment funds, that have suffered big losses this year. They are forced to sell their investments to raise cash for redemption requests from unhappy investors to meet margin calls.

So how low is low? Some market analysts who use stock price charts to glean future market direction, say it is possible for the Dow to test its lows hit in the last bear market in late 2002 and early 2003. That area is around 7500 on the blue chip average. The Dow would have to fall roughly 10% more to hit that level, which some analysts say should serve as a floor for prices.

"It's not inconceivable that we go back and test the lows we say in 2002 and 2003," says Todd Salamone, analyst at Schaeffer's Investment Research. "

Overseas, Japan's Nikkei stock average fell a staggering 9.60% overnight. In Europe, Germany's benchmark DAX index was down 4.96%, France's CAC40 dropped 3.54% while Britain's FTSE 100 sank 5% after the government said its gross domestic product fell 0.5% in the third quarter, putting the country on the brink of recession.

On Thursday, the Dow rose 172 points as investors went looking for bargains after two days of selling. Analysts have predicted that trading will remain volatile for the foreseeable future while investors test whether or not the market has hit a bottom.

"We've moved from credit market concerns to economic concerns and people really don't know what the impact on the economy is going to be, they don't know the full impact. The market abhors uncertainty," said Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J.

Demand for U.S. Treasurys remained high as investors sought safe places to put their money. The three-month bill, regarded as the safest asset around, fell to 0.85% from 0.94% late Thursday.

There were signs that credit markets continue to thaw but are doing so more slowly amid growing economic fears. The rate on three-month loans in dollars -- a key bank-to-bank lending benchmark known as the London Interbank Offered Rate, or Libor -- fell to 3.52% from 3.54% on Thursday.

The rates have fallen steadily for 10 days as confidence in the banking industry has been helped by government rescue measures. However, the improvements were smaller Friday on concerns about the health of the global economy.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.71 from 3.66% late Thursday.