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Sell-Off Follows Job, Debt Worries

NEW YORK - After rising virtually uninterrupted since its bear market low in March, the stock market is suddenly exhibiting a fragility not seen since the dark days of the financial crisis.

Rising investor angst was evident Thursday, when mounting worries over debt problems in Europe and a fresh reminder that jobs are hard to find in the USA, sparked a sell-off that pushed the Dow Jones industrials briefly back below 10,000 on its way to a 268-point loss - its biggest one-day drop since April.

The Dow, which hit a peak of 10,725 on Jan. 19, closed down 2.6 percent at 10,002.

Talk of a correction, or a drop of 10 percent, is also heating up, with the broad market now down 7.6 percent since its January high. "It's one thing to talk about a correction, but when it happens, investors start to have visions of March '09," says Quincy Krosby, market strategist at Prudential Financial.

The latest worry surrounds a familiar concern: debt. This time it's not ballooning debt at the corporate level, such as banks, that has investors worrying about defaults. But, rather, ballooning deficits facing countries such as Greece, Portugal and Spain.

"Sovereign risk (is) the new X-Factor," is the way Simon Ballard, a senior credit strategist at RBC Capital Markets, framed the latest risk in a report.

Some countries in Europe are having a tough time financing their rising debt, which has piled up due to a borrowing binge required to reflate slow-growing economies hurt by the global recession.

Mounting sovereign debt is viewed as a negative because it raises the risk of default and could result in higher borrowing costs for these countries, which could curtail growth. Most important, it raises the specter of "contagion," says John Stoltzfus, senior market strategist at Ticonderoga.

"Contagion is a big fear, that what happens in one country will spread to another," Stoltzfus says.

The ability of bad news to "overshadow" good news and rattle investors is "more about the psyche of the investor than the outlook for the economy," argues David Kelly, chief market strategist at JPMorgan Funds. The economic impact of the debt problems in Greece, he says, are not massive.

Kelly also says fears about jobs not being created this year are overblown, given that history has shown that job creation follows an economic upturn. Investors are bracing for the January non-farm payrolls report out today; analysts estimate 15,000 jobs were created. A report Thursday showed an uptick in initial jobless claims last week. Investors say job growth is needed if the recovery is to stick.

1 Responses »

  1. Interesting that while all of this was happening on Wall St we also had Washington voting to increase our debt load by up to $1.9 trillion and Moody's was issuing a warning that the US Govt AAA credit rating was at risk because of the growing debt.

    Maybe they are finally starting to realize that earnings reports are not the true measure of the health of the economy.