Investors stayed in a selling mood Thursday, sending major U.S. stock indexes skidding amid concerns about the fate of the revised financial-system rescue plan the Senate passed Wednesday night. The bill includes tax incentives designed to entice reluctant House Republicans. But earmarks added to the bill make the outcome of Friday's House vote uncertain.
Worries about a recession also contributed to declines. Economic reports released Thursday contained some discouraging news for the U.S. economy, with a small rise in first-time unemployment filings and a decline of 4.0% in August factory orders adding to the argument that the U.S. is heading into recession.
"The economic data basiclaly confirms that the economy is slipping into recession," says Peter Cardillo, chief market economist for Avalon Partners in New York. "That, along with waiting for the economic rescue package, is putting pressure on stocks."
Market analysts were also questioning what will happen if the bill does get passed. "Even when we do get the package, and I think we will, it's not going to cure all the ills of the economy," Cardillo says. The passage of the bill, he says, should help restore confidence in the credit markets and get credit flowing again.
"The credit situation has put us in a consumer-led recession," Cardillo says. "Hopefully it's going to be shallow, but if credit markets stay dysfunctional then all bets are off and we'll be in a serious deflationary period."
Says Sam Stovall, chief investment strategist at Standard & Poor's in New York: "Even if Congress passes a revised rescue plan, cascading concerns remain. Will it be enough to accomplish the required task of unfreezing credit markets? If so, are we just back to recession 101?"
"We believe a plan will be passed, but it will not shorten the recession," Stovall says. "Yet it should help put us closer to a market bottom."
On Thursday, the blue-chip Dow Jones industrial average dropped 348.22 points, or 3.22%, to 10,482.85. The broader S&P 500 index fell 46.78 points, or 4.03%, to 1,114.28. The tech-heavy Nasdaq composite index shed 92.68 points, or 4.48%, to 1,976.72.
On the New York Stock Exchange, 27 stocks declined in price for every 5 that advanced. The ratio on the Nasdaq was 23-5 negative. Trading was moderate.
Fertilizer and agricultural chemicals stocks were among the biggest losers Thursday after a Merrill Lynch analyst downgraded some companies in the group. Financial stocks were lower amid the fresh bailout concerns. Insurance stocks also got hit, after Senate Majority Leader Harry Reid said Wednesday night a major insurer is on the verge of bankruptcy, according to newswires. Reid didn't disclose the name of the insurer and said it was brought up by another senator during recent meetings.
The Senate handily passed a controversial financial rescue package Wednesday night, giving the bill its first legislative victory but adding provisions that could complicate efforts to push the $700 billion plan through the House of Representatives. A close vote is expected in the House on Friday.
In the meantime, credit markets continue to suffer. The total amount of commercial paper outstanding fell a record $94.9 billion to $1.607 trillion in the week ended Oct. 1, bringing the cumulative drop for the 3 weeks to $208 billion. The declines reflect the seizing up of the credit market and withdrawals of monies from money market funds, which held $700 billion of commercial paper at the end of the second quarter. The latest decline, which marks an abrupt shift, reflects the drying up of credit availability in the commercial paper market. The 7-day rate for asset-backed commercial paper has jumped to 4.50% from the roughly 2.5% rate that prevailed over the past few months. The commercial paper market is where entities go to raise working capital to produce goods and services. Issuers with mortgage-related exposures have been pushed out of the market, which is what makes this latest round of seizing up worrying, because the issuers that remain are considered far more stable entities with more predictable cash flows, according to S&P MarketScope.