World and Nation

Investor Fears Spark Another Rout for Markets

As a new bout of fear gripped the financial markets on Thursday, stocks fell sharply again, culminating a monthslong plunge that has wiped out the gains of the last decade.

The credit markets seized up as confidence in the nation’s financial system ebbed and people rushed to put money in Treasuries, the safest of investments. Some markets are now back to where they were before Congress approved the $700 billion financial rescue in October.

The Dow Jones industrial average fell nearly 445 points, or 5.6 percent. The broad market sank to its lowest level since 1997 — before the dot-com boom, the Nasdaq market bust and the ensuing bull market that drove stocks to record heights.

With Thursday’s rout, $8.3 trillion in stock-market wealth has been erased in the last 13 months.

Investors are growing increasingly worried that big banks like Citigroup, JPMorgan Chase and Bank of America, which have all received billions of dollars from the government to bolster their finances, are still too weak. The price of Citigroup’s shares plunged 26.4 percent on Thursday, and other financial shares fell to fresh bear-market lows.

The broad Standard & Poor’s 500-stock index fell 6.7 percent, leaving that benchmark down about 52 percent from its peak in October 2007. The Dow Jones industrial average closed at 7,552.29, barely above its low in October 2002, during the depths of the last bear market. The Nasdaq composite index fell 5 percent, to 1,316.12.

“This is a response to real fear,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “We each have to look inside and say, is the fear warranted?”

The sell-off gathered force over the last several days and brought an abrupt end to what had been a modest improvement in financial markets. After Federal Reserve began making short-term loans directly to businesses last month, a semblance of normalcy had returned credit markets, and the stock market, although volatile, had held above its old lows.

But investor confidence, which has been incredibly shaky since the bankruptcy of Lehman Brothers, was dealt a severe blow when the Treasury Department announced last week that it would not buy troubled mortgage assets using the $700 billion that Congress approved in October. Economic reports showing rising unemployment, falling consumer prices and disastrous retail sales compounded the damage. The risk that one or all of the Detroit automakers might go bankrupt added to the gloom.

“The profit drag on corporate America is widening and deepening, and this is leading to more layoffs and cutbacks in capital spending, which is extending and deepening the recession,” said Stuart Schweitzer, global markets strategist for J.P. Morgan Private Bank. “We’ve gotten into a full-blown, self-feeding downturn.”

More bad economic news arrived on Thursday morning, when the Labor Department reported that new claims for unemployment benefits rose to a seasonally adjusted 542,000 last week, the highest level since July 1992. Unemployment is also climbing at a rapid clip in Europe and the once sizzling economies in Asia and Latin America are starting to sputter.