STOCKS PLUMMET

It started in China.  Regulators there apparently looked at the level of personal loans supporting stock purchases and didn’t like what they saw.  Their reaction, one day after the major Shanghai index closed at an all time high, sent that same index plummeting 8.84% to its steepest drop in 10 years.

The smaller Shenzhen Stock Exchange lost 9.29%.  Turnover on the two bourses equated 24.8 billion in U.S. dollars.

As dawn spread across the United States, some concern was evident, but it wasn’t until after 2:30 PM that the major crash occurred.  At one point the Dow was down 546.02 points, but late buying, possibly assisted by steps taken by federal authorities, reduced the loss to about 416 points, or 3.3%, at the closing.

The dollar slipped against other major currencies, while gold also fell.  Bond yields dropped as investors shifted into a safer haven.

The U.S. market was ready for a fall, and, in this case, China was merely the trigger.  A Commerce Department Report that orders for durable goods in January dropped by the largest amount in three months exacerbated jitters about the direction of the U.S. economy, just a day after former Federal Reserve Chairman Alan Greenspan said the United States may be heading for a recession.

Speaking via a satellite link to a business conference in Hong Kong, Greenspan said that economic indicators suggested that we are in the later stages of a cycle and that we could experience the beginning of a recession by the end of the year. 

He also said that “the American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy’s immediate future and that of the rest of the world.”

The report of a suicide bomber incident at the main military base in Afghanistan, where Vice President Cheney was visiting, unsettled a few nerves.  Also, the spike in oil prices did not help the mood of investors, as declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 1.39 billion shares.

Indeed, as the stock market has been reaching a series of new highs in 2007, it has been doing so against a backdrop of a three year slide in year-over-year profit growth for the S&P 500 companies.  It was becoming increasingly apparent that something had to give.

As for the future, history suggests that investors have generally viewed the immediate aftermath of a crash as an opportunity to grab some bargains.  Of course, a major exception to that occurred in late October and November of 1929.

Many eyes will be following the course of the Chinese markets tonight.  The chances are that the situation will settle down over the next few days.  Beyond that, it’s anyone’s guess.  However, as for the unbridled optimism that we’ve seen lately, the bloom may be off that rose.