Carnage on Wall Street: Dow sinks 634 points as panic rules

New York: US stocks plunged on Monday in the heaviest volume since last year's "flash crash," taking the S&P 500 down more than 6 percent on growing fears of a recession, in the first session after the historic loss of the country's pristine triple-A credit rating.

Panicked selling resulted in the S&P 500's worst day since December 2008, with every stock in the benchmark index ending in negative territory. It capped a day when stocks were routed around the world, as investors lost confidence that Europe and the US can rein in their budgets quickly and fear spread of a double-dip recession.

 Carnage on Wall Street: Dow sinks 634 points as panic rules

Wall Street is in the grip of panic. Lucas Jackson/Reuters

"We're starting to see real disorderly selling, far more than what we've been seeing," said Matthew Peron, head of active equities at the Chicago-based Northern Trust, which has about $650 billion in assets under management. Based on the surge in the Volatiity Index (VIX), he added, "We're starting to move into panic mode."

The Dow Jones industrial average lost 634.76 points, or 5.55 percent, to end at 10,809.85. The Standard & Poor's 500 Index sank 79.92 points, or 6.66 percent, to finish at 1,119.46. The Nasdaq Composite Index plunged 174.72 points, or 6.90 percent, to close at 2,357.69.

Perceptions that Washington is incapable of addressing the problems of rising debt and slowing growth have contributed to the selling. This was underlined by selling that accelerated during a statement from President Barack Obama that offered few concrete ways to resolve the fiscal and economic problems.

At Knight Capital in Jersey City, one of the biggest trading venues in the United States, the atmosphere grew more heated as losses accelerated into the close. After the bell, traders huddled in groups, staring at their computer screens and discussing the day's actions.

"It's scary"

"It's scary, it really is," said Joseph Mazzella, senior equity trader, who had been watching the market's intraday low as a support level. "I hate it when the market closes below its low, as it sets the stocks up for a follow-through tomorrow."

The anxiety about the US economy was matched by rising worries about Europe's debt problems, where the latest initiative to buy Italian and Spanish bonds is far from enough to solve the euro zone's debt crisis.

The CBOE Volatility Index, Wall Street's "fear gauge," jumped 50 percent to end at 48. This marked the first time the VIX has topped 40 since May 2010.

The S&P 500 is down 17.9 percent from its 2011 closing high, reached on April 29 -- putting it close to the 20 percent decline from a recent peak that Wall Street defines as bear market territory.

Monday's slide marked the first time since November that the Dow has fallen below 11,000.

"It is a panic, and almost by definition, it doesn't have an issue. It wouldn't matter what it was," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, which has over $340 billion in assets under management.

Global loss over $1 trillion on Monday

Monday's global stock market sell-off wiped out more than $1.35 trillion in investor wealth worldwide, according to the 5.2 percent drop in the MSCI World Index . The index began the week with a market value of $26.42 trillion. The S&P 500 alone lost $729.3 billion in value.

Over the past eight days, stock losses have wiped more than $3.8 trillion from investor wealth globally = and sent investors rushing for safety in the Swiss franc, the Japanese yen and gold.

"Almost universally my clients are blaming this on 'The Government,' this lack of confidence -- and that is what this is," said William Suplee, a financial adviser at Structured Asset Management in Paoli, Pennsylvania. "This sell-off is uniformly blamed by my clients on the government's inability to act rationally."

Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.

Time to buy?

But some analysts noted the mass selling has made some stocks attractive at much lower prices.

"Based on historical sell-offs, it wouldn't be surprising to see a rebound in the more oversold areas, given how far down we've come and how fast," said Brad Sorensen, director of market and sector analysis at Charles Schwab in Denver.

Barclays Capital, in a note to clients, wrote that the decline created a "time to buy," and that the recent losses "left equity valuations at levels of cheapness not seen since the early 1980s.

"I've been in this business almost 30 years. When it gets to the point where you want to throw up, it's probably time to buy, and we're there," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

Fed meeting today

The worsening market turmoil puts significant pressure on the US Federal Reserve at its regular policy meeting on Tuesday to announce some fresh measures of support for a damaged US economy."If the Fed does nothing, it could prove to be a disappointment at this point," said JP Morgan analysts.

In the US, estimates of recession risks are rising. Goldman Sachs had put them at one in three last week, before the latest sell-off.

"This massive move in the equity market does dim the economic outlook for the next six months," said Carl Riccadonna, senior US economist at Deutsche Bank in New York. "We would put the recession odds at about 40 percent and about two weeks ago they were at about a 10 percent chance."

Reuters

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Updated Date: Dec 20, 2014 05:24:52 IST