The stock market closed out a painful second quarter Wednesday and left investors with heavy losses and far more doubts about the economy than they had just months ago.
Stocks had their worst quarterly performance since the financial crisis. The Standard & Poor's 500 index, considered by many professional investors to be the best measure of the market's health, lost 11.9 percent, while the Dow Jones industrial average lost 10 percent. Both indexes are at their lows for 2010.
Meanwhile, Treasury notes and bonds soared during the quarter, driving interest rates sharply lower, as investors turning away from stocks sought a place where their money would be safe. In the early days of the quarter, the yield on the Treasury's 10-year note, used as a base for setting rates on consumer loans including mortgages, was close to 4 percent. By the quarter's end, it had fallen to 2.94 percent.
On the last day of the April-June period, the Dow lost 96 points, and all the big indexes were down about 1 percent.
Using the S&P 500 as a benchmark, stocks had their worst quarterly loss since the fourth quarter of 2008, when the index plunged 22.6 percent. For the first half, the index is down 7.8 percent, its worst first-half showing since the 13.8 percent it loss at the start of 2002.
The S&P 500 lost 11.43 percent during the quarter when dividends are included. The market lost about $1.6 trillion in value during the quarter, as measured by the Dow Jones U.S. Total Stock Market Index, which tracks nearly all U.S.-based companies.
Investors spent much of the quarter repeating the same questions they had a year earlier: Can the economy continue its recovery? Analysts say the answer most likely is yes but that traders are realizing it won't be easy.
After reaching its highest point since the financial crisis in April, the market began its plunging in May when investors grew fearful that Greece wouldn't make good on debt payments. Its economy represents only a tiny part of the European Union but traders worried that bad debt would trip up the world's financial system the way it did after the collapse of Lehman Brothers in September 2008. Those fears morphed into concerns about how much countries have been spending to revive growth.
Investors who still feel burned by the losses of the financial crisis also seized on mixed economic news as an indication that the rebound was sputtering. Now, investors are trying to determine how the recovery will play out.
Economist Joel Naroff of Naroff Economic Advisors says investors are disappointed the economy is not growing as strongly as they had anticipated earlier this year amid talk of a so-called V-shaped recovery, in which the economy rebounds sharply after its big drop. But he thinks investors have sold too much.
"They're thinking, 'Gee, if we're not getting a V-shaped recovery, we'll get a double dip.' They've gone from euphoria to depression," Naroff says. "The reality is somewhere in between."
Ted Aronson, a partner at Aronson-Johnson-Ortiz in Philadelphia, was a little baffled by traders' attitudes during the quarter.
"I don't know what's going on. (The markets) are always interesting. But this is really wacky," he said.
Some analysts said the rocky second quarter was to be expected, given the market's history of recovering from big drops like the one stocks suffered during the 2008-09 financial crisis.
Sam Stovall, chief investment strategist of U.S. equity research at Standard & Poor's, dates the end of the latest recession to August of last year. That means the now-complete second quarter is the third full quarter since the recession's end. He noted that stocks drops are not uncommon in such a period; in fact, they happened following three of the four recessions prior to the latest one.
"Investors anticipate what's going to happen (in a recovery), and sometimes they over-anticipate," Stovall said. After a couple of quarters pass, investors go through a "reality readjustment."
And apparently they're still not through at that point: Prices also tend to fall in the fourth quarter after recessions end, though Stovall cautions his data is more a curiosity than conclusive.
The quarter's final day saw a last-hour selloff that has become standard operating procedure, especially when a big economic number like the government's June employment report due out Friday is imminent.
Karl Mills, chief Investment Officer at money manager Jurika, Mills & Kiefer, pointed to a lack of buyers in the market that forced sellers to keep lowering their prices to get someone to buy.
"No one wants to be a hero. Everyone is looking to employment numbers coming out Friday," he said.
The Dow fell 96.28, or 1 percent, to 9,774.02. The Standard & Poor's 500 index fell 10.53, or 1 percent, to 1,030.71, while the Nasdaq composite index fell 25.94, or 1.2 percent, to 2,109.24.
Losing stocks outnumbered gainers on the New York Stock Exchange by about 2 to 1. Consolidated volume came to 5.3 billion shares, compared with 6.3 billion on Tuesday.
The industries that suffered the most losses during the quarter were energy companies and materials producers, according to S&P. Both industries were hurt by a drop in commodities prices. Commodities, like stocks, were seen as too risky for many investors to hold on to.
Utilities and telecommunications stocks, while also losing ground, outperformed the rest of the market.
Investors kept shifting their focus during the quarter. When they first began worrying about the possible spillover of Europe's economic problems to the U.S., they were ignoring upbeat signs about the domestic recovery. But as the quarter wore on, U.S. economic reports became more mixed. And while Federal Reserve Chairman Ben Bernanke and other economists kept making reassuring comments about the recovery, investors gave in to their fears and sold heavily. Triple-digit losses in the Dow became commonplace.
As the third quarter starts, the focus will be on the upcoming jobs report, and, in the weeks ahead, companies second-quarter earnings reports and forecasts for the coming quarters. Any disappointments are likely to keep sending stocks lower.
On Wednesday, ADP said private employers added just 13,000 jobs in June. That's well short of the forecast of 60,000 from economists polled by Thomson Reuters. The ADP report is often seen as a precursor to the government's monthly jobs report, which is expected Friday.
The Labor Department report is expected to say that employers cut 110,000 jobs in June. However, economists predict the bulk of the loss is tied to the government laying off temporary workers hired for the 2010 census.
Companies have been slow to add jobs coming out of the recession. Consumer confidence has fallen and spending has not picked up as investors had hoped because there are still so many people out of work.
As investors pulled out of stocks throughout the quarter, U.S. Treasurys and gold were big beneficiaries. The perceived safety of the two helped push bond and gold prices higher.
The yield on the 10-year Treasury note, which moves opposite its price, went below 3 percent for the first time in more than a year on Tuesday, falling to 2.97 percent. It came off that low Wednesday, rising to 2.94 percent.
Gold rose $1.70 to $1,244.10 an ounce Wednesday, and is up nearly 12 percent for the quarter.
The Russell 2000 index of smaller companies fell 6.47, or 1 percent, to 609.49.
Britain's FTSE 100 edged up 0.1 percent, Germany's DAX index gained 0.2 percent, and France's CAC-40 rose 0.3 percent.
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