Stocks retreat as Fed grows more cautious

WEDNESDAY, AUG. 11, 2010, 8:19 A.M.

NEW YORK — Stocks and interest rates tumbled Wednesday as investors around the world took an bleaker view of the U.S. economy.

The Dow Jones industrial average fell more than 200 points and all the major indexes fell more than 2 percent. The yield on the Treasury’s 10-year note fell to its lowest level since March 2009 as investors sought the safety of government securities.

Companies across a wide range of industries were down Wednesday. Only 324 stocks rose on the New York Stock Exchange, while 2,564 fell, a sign that investors expecting all businesses to suffer if the economy continues to weaken.

Investors’ gloom deepened a day after the Federal Reserve said it would begin buying government bonds as a way to stimulate the economy. Stocks began their plunge in Japan, where the Nikkei stock average fell 2.7 percent, and heavy sellingn followed in Europe and then the U.S.

Stock traders tend to buy and sell based on their expectations for what business will be like in six to nine months. The problem for investors is that economic data has been so muddled lately that have no sense of whether the recovery will hold.

“Uncertainty, uncertainty, uncertainty,” was the way that Javier Perez-Santalla, managing director for futures and foreign exchange at the institutional brokerage firm Dinosaur Group, described the mood in the market.

“Everyone is scratching their heads, saying ’which way?”’ Perez-Santalla said. “We’re kind of stuck in this no man’s land, where we’re damned if we do, damned if we don’t.”

The Fed said Tuesday it will start buying government bonds with money it gets from the maturing mortgage-backed bonds that it bought during the recession. The goal is to try to cut interest rates on mortgages and corporate loans and in turn increase lending and help the economy grow faster.

But the Fed’s moves were expected to be quite small in comparison to what the economy needs. And many investors were selling because the debt purchases would have only a limited impact on the economy.

In late morning trading, the Dow Jones industrial average dropped 239 points, to 10,405. The Standard & Poor’s 500 index fell 30, to 1,093.

The S&P 500 slipped below 1,100, a key technical and psychological level. Falling and holding below that level could lead to more selling as computer-driven trading sets in.

The Nasdaq composite index fell 68, to 2,209. The Nasdaq tends to have the biggest losses when stocks are falling sharply because many of its component companies are smaller businesses that tend to struggle the most in a weak economy.

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