Fearing that the crisis in the financial industry could stun the broader economy, investors drove stocks down almost 5 percent on Monday, sending the Dow Jones industrial average and Standard & Poor’s 500-stock index to their lowest levels in two years.
The Dow fell 504.48 points, its biggest one-day point drop since Sept. 17, 2001, the first trading day after the Sept. 11 terrorist attacks.
In the minutes before the opening of the New York Stock Exchange, dozens of traders were clustered around the specialists who oversee trading of American International Group and Bank of America, shouting bids and offers. As the opening bell clanged, dozens of flat-panel monitors around the specialists’ posts pulsed with frantic trading.
With Lehman filing for bankruptcy and AIG in distress, investors were worried that consumers and companies would have difficulty getting loans.
The credit markets, in turmoil for more than a year, showed new distress on Monday. Prices of credit default swaps, used by institutional investors for protection from potential bond defaults, rose sharply.
The prices of Treasury bills and notes soared as investors sought safe places to park their capital. Oil prices dropped sharply on Monday, on concerns that demand for energy would shrink as economies slowed down.
The market volatility was likely to continue for some time, economists and strategists said.
“By my own forecasts, it gets worse before it gets better,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.
On Tuesday, Goldman Sachs will report its earnings, and the Federal Reserve will decide whether to change short-term interest rates. On Wednesday, Morgan Stanley reports earnings.
“Markets will remain unusually volatile for a period of time,” said Marc Stern, chief investment officer of Bessemer Trust, which manages about $50 billion. “This isn’t a fun period for most investors.”
Financial companies led the plunge on Monday, with Goldman Sachs dropping 12 percent and Citigroup falling 15 percent. But stocks that investors view as particularly sensitive to a slower economy, like those of technology companies and manufacturers, were also punished.
On Monday, the Dow closed at 10,917.51, down 4.4 percent. The S&P 500-stock index of the biggest U.S. public companies fared even worse, falling 59.00 points, or 4.7 percent, to 1,192.69, its lowest close since October 2005.
The crisis on Wall Street caused by the bursting of the real-estate bubble has now lasted 13 months and has caused far more damage than analysts initially forecast.
In the last two months, the chaos has taken a vicious turn, with investors quick to attack any financial company whose balance sheet appears less than pristine. Three of the five biggest American investment banks have failed or been bought since March, and Fannie Mae and Freddie Mac, the giant mortgage companies, were effectively nationalized earlier this month.
Plunging housing prices have also crimped consumer spending and slowed the overall economy, which has lost 700,000 jobs this year.