What began as a relatively weak day in the stock markets ended in the worst rout in more than two years, as investors dumped stocks amid anxiety that both Europe and the United States were failing to fix deepening economic problems.
With a steep decline of around 5 percent in the United States on Thursday, stocks have now fallen nearly 11 percent in two weeks, culminating in a frantic sell-off as investors sought safer investments — including Treasury bonds, which some had been avoiding during the debate over extending the nation’s debt ceiling.
Sparking the drop was an unsuccessful effort by the European Central Bank to reassure the markets, which instead ended up spooking investors. The bank intervened with a show of support to buy bonds of some smaller countries, but not Italy and Spain, whose mounting troubles have come into the spotlight. This was taken as a sign that the recent rescue packages put in place by Europe could soon be overwhelmed by the huge debt burdens in those two countries.
Investors were further unnerved by a candid remark by José Manuel Barroso, the European Commission president, who seemed to confirm fears about the sense of political paralysis. Rather than play down the problems, as European officials have done since the debt crisis began last year, he said, “Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.”
With investors in the United States already focusing anew on fragile economic growth and high unemployment, waves of selling of stocks began in Europe and continued throughout the day in the United States. Analysts said the market still might have further to fall, as investors reassess the dimming economic prospects. In the short run, attention will be focused on critical unemployment numbers for July to be released on Friday morning. And some in the markets are already questioning whether the Federal Reserve has done enough to mend the economy and whether it could soon take further steps to stimulate growth.
On Thursday, more than 14 billion shares changed hands, the heaviest selling in more than a year. In addition to being unnerved by weaker economic data reported in recent days, investors appeared to lose their optimism about the strength of corporate profits that had driven increases in the stock market in the first half of this year.
At the close, the Standard & Poor’s 500-stock index was down 60.27 points, or 4.78 percent, to 1,200.07. The Dow Jones industrial average was off 512.76 points, or 4.31 percent, to 11,383.68, and the Nasdaq was down 136.68, or 5.08 percent, to 2,556.39.
The S.& P. 500 has now fallen 10.7 percent from 1,345 on July 22, underlining the new negative investment sentiment about the economy and about Europe.
“We are now in correction mode,” said Sam Stovall, chief investment strategist at Standard & Poor’s. “We could have another couple of weeks to go before it bottoms.”
The last time the market was in a correction was last summer, when it fell 16 percent before recovering.
Analysts said credit markets were still healthy and the United States was now stronger than just a few years ago so that a repeat of the financial crisis was unlikely.
“There is a huge difference — during the financial crisis the banking sector broke down. Right now it’s a crisis of confidence based on weak economies but the banking sector is not broken,” said Reena Aggarwal, professor of finance at Georgetown University.
Washington’s reaction to the market’s tumble was muted. The Treasury Department said it did not plan to issue any statements or provide officials to comment.
“Markets go up and down,” said the White House spokesman, Jay Carney. “We obviously are monitoring the situation in Europe closely.”
As the prospects for economic growth dimmed, several commodities, including oil, silver and palladium, fell by more than 5 percent, perhaps producing some good news for consumers.
With oil prices dropping below $87 a barrel, wiping out the rise caused by unrest in the Middle East and North Africa earlier in the year, drivers can expect sharply lower gasoline prices just in time for the Labor Day weekend and back-to-school shopping.
Agricultural crops and most industrial metals fell somewhat less drastically, with copper falling 1.9 percent, aluminum by 1.7 percent, corn by 1.9 percent, wheat by 3.4 percent and soybeans by 1.8 percent.
Taken together, the drops should mean lower input costs for manufacturers and give the Federal Reserve more policy options should the economy continue to slow.
A closely-watched survey of American investor attitudes provided by the American Association of Individual investors on Thursday showed the biggest increase in bearish sentiment for five years in the latest week. As investors fled assets like stocks, they piled into the perceived safety of United States Treasuries where 10-year interest rates fell to 2.64 percent, recording the biggest one day fall since March 2009.
Yields on one-month United States notes actually fell into negative territory before closing at zero.
Besides piling into treasuries, institutional investors are also seeking out the safety of cold, hard cash, pouring billions into commercial bank accounts backed up by the Federal Deposit Insurance Corporation. Investors had also been buying Swiss francs and Japanese yen. But earlier this week, Switzerland unexpectedly cut interest rates in an effort to weaken the franc. Japan on Thursday also intervened to weaken its currency, raising the specter that more nations could take similar steps to try to protect their economies.
Around the world, markets from Brazil to Turkey were battered.
In Britain, stocks closed down 3.43 percent. In Germany, the DAX index dropped 3.4 percent. In France, the CAC 40 closed down 3.9 percent.
“It really is Europe today,” said Barry Knapp, head of United States equity strategy at Barclays Capital. “The market feels that European leaders are on step behind, and they are.”
Asian markets quickly followed suit in trading lower. In morning trading on Friday, the Nikkei 225 in Japan was down 3.5 percent to 9,316.93 while the S&P/ASX 200 index in Australia fell 3.6 percent to 4,120.50.
With some warning signs that weaker European banks are struggling to fund themselves, the central bank moved to help weaker banks by expanding its lending to institutions in the euro zone. Bank stocks nevertheless fell sharply in Europe.
In the United States, as the stock market fell, it broke through important support levels, triggering further selling by traders as they rushed to reduce their exposure to plummeting prices. That included computerized program traders, one analyst said.
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