Dow falls 391 on worldwide fears about economy

NEW YORK >> Investors on Wall Street and around the world sold stocks with abandon Thursday, more convinced than ever that a global recession is under way. The Dow Jones industrial average lost almost 400 points.

The sell-off began in Asia, intensified in Europe and rattled markets in the United States all day. Stocks in New York staged a small rally before the end of trading but still finished near their lows for the year.

One financial indicator after another showed that investors are quickly losing hope that the economy can keep growing. The price of oil and metals, both of which depend on economic demand, fell sharply. Traders bought bonds for safety.

FedEx, a company that ships so many goods it is considered a barometer of the U.S. economy, had to lower its earnings forecast for the year because its customers are putting off purchases of electronics and other gadgets from China.

The Dow fell 391.01 points, or 3.5 percent, and closed at 10,733.83. The selling was not just steep but broad: Nineteen stocks on the New York Stock Exchange fell for every one that rose. At one point, the Dow was down more than 500 points.

"Markets rely on confidence and certainty. Right now there is neither," said John Canally, an economic strategist at LPL Financial, an investment firm in Boston.

It was the second consecutive rout in the stock market since the Federal Reserve announced a change in strategy for fighting the economic slowdown — a bid to lower long-term interest rates and get people and companies to spend more money.

Economic news was bad around the world. A closely watched survey in Europe indicated a recession could be on the way there, and a manufacturing survey suggested a slowdown in China, which has been one of the hottest economies.

"The probability of going back into recession is higher now than at any point in the recovery," said Tim Quinlan, an economist at Wells Fargo. He put his odds of a recession at 35 percent, the highest yet.

Christine Lagarde, the head of the International Monetary Fund, said the world economy was "entering a dangerous phase." She told an annual meeting of the IMF and World Bank that nations need credible plans to get their debt under control.

In the United States, investors poured money into American government debt, which they see as less risky than stocks even as the nation wrestles with how to tame its long-term budget problems.

The yield on the 10-year Treasury note hit 1.71 percent — the lowest since the Federal Reserve Bank of St. Louis started keeping daily records half a century ago. It was 3.66 percent as recently as February, when the economic forecast was brighter.

Yields fall as investors buy bonds and send their prices higher. Small yields are a sign that investors are just looking for a safe place to park their cash.

"They want to get their money back," said Guy LeBas, chief fixed income strategist at Janney Capital Markets. "How much they earn is secondary."

The Dow almost matched its lowest close of the year, 10,719 on Aug. 10. The stock market was seized by volatility last month, and at one point strung together four consecutive days of 400-point moves up or down.

In a sign of what a rocky year it has been for the stock market, Thursday’s decline isn’t even close to the biggest in 2011. The Dow fell 634 points on Aug. 8, 519 points on Aug. 10 and 512 points on Aug. 4.

It would have to fall 485 more points to reach the traditional definition of a bear market — a 20 percent decline from the market’s peak since the financial meltdown in 2008. That peak was in April.

The Standard & Poor’s 500 index, a broader measure of the stock market, and the Nasdaq composite, which is more heavily weighted with technology stocks, both fell more than 3 percent for the day.

To get the economy going, President Barack Obama has proposed a $447 billion package of tax cuts, public works projects and benefits for the unemployed, but it is far from clear that it can pass the Republican-controlled House.

While the market was falling Thursday, the president stood in front of an aging bridge that connects Ohio and Kentucky. He exhorted Republicans: "Help us put this country back to work. Pass this jobs bill right away."

Top Republicans in Congress accused Obama of trying to score political points. If Congress fails to pass the jobs bill, it would leave the Fed action this week as the only major new initiative to jolt the economy back to life.

The Fed announced Wednesday that it would shuffle $400 billion of its own holdings in hopes of reducing interest rates on long-term loans. The plan is known as Operation Twist, a nod to a similar approach taken by the Fed during the time of Chubby Checker.

The central bank hopes that allowing people and businesses to borrow money more cheaply will encourage them to spend it throughout the economy, providing a lift that could turn it around.

Still, the Fed announcement troubled investors because it came with a bleak assessment of the future of the U.S. economy. The Fed said it sees "significant downside risks to the economic outlook," including volatility in overseas markets.

"In financial markets, the thinking seems to be: If the Fed is worried, the rest of us ought to be really worried," said Brian Gendreau, senior investment strategist at Cetera Financial Group.

Economists say the Fed action may help, but probably not much. The only thing that will help is for people and businesses to start spending more money, said Uri Landesman, president of Platinum Partners, a hedge fund.

"Counting on the Fed to get us out of this is a mistake," he said.

The price of commodities like oil and metals dropped steeply because investors worried that demand for them would fall if the world economy keeps slowing or falls into recession again.

Oil dropped more than $5 a barrel to $80.51, its lowest settling price since Aug. 9. The selling reflected concerns that world demand for oil would fall if the economy slows.

"This is just sudden and strong confirmation that the economy is not improving," said Michael Lynch, president of Strategic Energy & Economic Research. "Energy demand is going to be very poor."

The price of silver fell 9.6 percent. And gold fell 3.7 percent. Earlier this summer, gold set one record high after another. Investors wanted it both as a safe place for their money and to cash in on what seemed an unstoppable run.

Stocks fell sharply even though the New York Stock Exchange executed a rule designed to smooth trading. The exchange invoked Rule 48, which limits how much information is released about stock trades.

Stock volatility rose anyway. The VIX, an index that measures investor fear, rose 17 percent to 43.7, well above average.

It’s common for stocks to move dramatically after the Fed makes a big announcement. But the number of trades that can be made instantly has also gone up in recent years, causing big swings to happen more quickly.

"These major moves are much more compressed, time-wise, than in the past," Landesman said. "A 5 percent move can now happen in a couple of minutes as opposed to a week or two."

Some analysts thought the heavy selling was an overreaction.

"The facts show we are not in a recession, and we are not borderline recession," Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi, wrote in a report Thursday.

The U.S. economy grew at an annual rate of 0.7 percent in the first half of this year, the slowest growth since the end of the Great Recession in June 2009. It would take much healthier growth, 4 or 5 percent, to bring unemployment down significantly.

The government reported Thursday that fewer Americans filed new claims for unemployment benefits last week. But the decline wasn’t nearly enough to raise any real hope that the job market is getting better.

Asian stocks were hammered to start the world’s trading. The Nikkei index in Japan fell 2.1 percent. The main stock averages fell 2.8 percent in China, 2.9 percent in South Korea, 2.6 percent in Australia and almost 5 percent in Hong Kong.

Europe fared even worse. The stock market fell 5.3 percent in France, 5 percent in Germany and 4.7 percent in Britain.

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AP Economics Writers Martin Crutsinger, Christopher S. Rugaber and Paul Wiseman in Washington and AP Business Writer Matthew Craft in New York contributed to this report.