Markets Decline on Poor Economic Reports

Wall Street Sees Senate Vote As Positive Sign

Investors are digesting the Senate's overwhelming approval of a $700 billion financial rescue package, which now moves to the House. The AP's Bonny Ghosh reports.

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By Renae Merle

Washington Post Staff Writer
Thursday, October 2, 2008; 3:56 PM

Stocks tumbled today as a set of disappointing economic reports -- an uptick in unemployment claims and decline in factory orders -- offset progress on a rescue plan for the financial sector.

The Dow Jones industrial average fell more than 350 points today, more than 3 percent, and continued to fall minutes before the market close. The Nasdaq and Standard & Poor's 500 were both down 4 percent.

Investors appear concerned that the bailout, while needed, will not be enough to address the country's fundamental economic problems and that the financial crisis has already spread from investment banks to other parts of the economy. "I think it's clear to investors that while we have been focused on the rescue plan in DC it is too late to avoid a recession," said Ed Yardeni, an investment strategist for Yardeni Investments.

The Senate passed the bailout plan late yesterday, moving the country towards a program to buy up the bad debt weighing down financial firms. The House is expected to take up the legislation tomorrow after spurring a record market sell off Monday by initially rejecting the plan.

The bill's progress helped boost some financial firms today. Sovereign Bancorp and National City, which have both faced market pressure, were up 7 percent and 3 percent.

After dismissing a trickle of economic data, investors are putting together a grim picture that has some on Wall Street convinced that the Federal Reserve will lower interest rates again to help boost the economy. During the last two weeks, reports have shown that consumer spending has stalled, housing prices continue to fall and manufacturing activity is nearing recession territory. In the meantime, analysts have grown concerned that the financial crisis will not be contained to the U.S. as Europe's banking sector endures its own troubles.

"If this bill passes, you're still going to have an economy that is weakening for at least several months," Michael T. Darda, chief economist at trading and research firm MKM Partners in Greenwich, Conn.

Today's market declines, Darda said, also reflect a delayed reaction to the continuing credit crisis. Banks remain reluctant to loan money to each other. "I wouldn't expect any improvement in stocks until we see the credit crisis is dealt with," said Darda.

A Barclays Capital analyst downgraded the industrial sector today, arguing that the credit crunch could lead to a prolonged slowdown, sending manufacturing stocks down. Honeywell International fell 4 percent in afternoon trading, while Textron was down 7 percent.

Also sparking concern on Wall Street today was a report that applications for unemployment benefits rose at an unexpectedly high rate last week, reaching a seven-year high. It comes as many analysts anxiously await September's unemployment figures scheduled to be released tomorrow

"We're waiting with baited breath on the [unemployment] survey tomorrow," said Bill Knapp, investment strategist for Mainstay Investments.

Initial jobless claims rose by 1,000 to a seasonally adjusted 497,000, which the Labor Department partly blamed on the two hurricanes that hit Texas and Louisiana this summer.

But even accounting for the impact of the hurricanes, the figures illustrate a weak labor market that has some worried. "The slow and steady march upward in the continuing claims series supports our forecast for the rate of unemployment to increase to 6.2 percent," Joseph Brusuelas, chief economist for Merk Investments, said in a research note.

In addition, the Commerce department reported a two-year low in factory orders this morning, led by weak demand for aircraft and autos. Orders fell by 4 percent in August compared to July, a far worse showing than the 2.5 percent decline forecast by analysts.

"It now looks like that the numbers are showing that we may not be able to count on foreign exports to keep our economy our of a deeper recession than we have had so far," said Yardeni.