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Stock prices hit year’s low

Recovery doubts linger as cautious investors anticipate government’s employment report

NEW YORK – The stock market closed out a painful second quarter Wednesday and left investors with heavy losses and far more doubts about the economy than they had just months ago.

Stocks had their worst quarterly performance since the financial crisis. The Standard & Poor’s 500 index, considered by many professional investors to be the best measure of the market’s health, lost 11.9 percent, while the Dow Jones industrial average lost 10 percent. Both indexes are at their lows for 2010.

Meanwhile, Treasury notes and bonds soared during the quarter, driving interest rates sharply lower, as investors turning away from stocks sought a place where their money would be safe. In the early days of the quarter, the yield on the Treasury’s 10-year note, used as a base for setting rates on consumer loans including mortgages, was close to 4 percent. By the quarter’s end, it had fallen to 2.94 percent.

On the last day of the April-June period, the Dow lost 96 points, and all the big indexes were down about 1 percent.

Using the S&P 500 as a benchmark, stocks had their worst quarterly loss since the fourth quarter of 2008, when the index plunged 22.6 percent. For the first half, the index is down 7.8 percent, its worst first-half showing since the 13.8 percent it lost at the start of 2002.

The market lost about $1.6 trillion in value during the quarter, as measured by the Dow Jones U.S. Total Stock Market Index, which tracks nearly all U.S.-based companies.

Investors spent much of the quarter repeating the same questions they had a year earlier: Can the economy continue its recovery? Analysts say the answer most likely is yes but that traders are realizing it won’t be easy.

After reaching its highest point since the financial crisis in April, the market began its plunge in May when investors grew fearful that Greece wouldn’t make good on debt payments. Its economy represents only a tiny part of the European Union, but traders worried that bad debt would trip up the world’s financial system the way it did after the collapse of Lehman Brothers in September 2008. Those fears morphed into concerns about how much countries have been spending to revive growth.

Investors who still feel burned by the losses of the financial crisis also seized on mixed economic news as an indication that the rebound was sputtering. Now, investors are trying to determine how the recovery will play out.

Economist Joel Naroff, of Naroff Economic Advisors, says investors are disappointed the economy is not growing as strongly as they had anticipated earlier this year amid talk of a so-called V-shaped recovery, in which the economy rebounds sharply after its big drop. But he thinks investors have sold too much.

“They’re thinking, ‘Gee, if we’re not getting a V-shaped recovery, we’ll get a double dip.’ They’ve gone from euphoria to depression,” Naroff says. “The reality is somewhere in between.”

Ted Aronson, a partner at Aronson-Johnson-Ortiz in Philadelphia, was a little baffled by traders’ attitudes during the quarter.

“I don’t know what’s going on. (The markets) are always interesting. But this is really wacky,” he said.

Some analysts said the rocky second quarter was to be expected, given the market’s history of recovering from big drops like the one stocks suffered during the 2008-’09 financial crisis.

Sam Stovall, chief investment strategist of U.S. equity research at Standard & Poor’s, dates the end of the latest recession to August of last year. That means the now-complete second quarter is the third full quarter since the recession’s end. He noted that stock drops are not uncommon in such a period; in fact, they happened following three of the four recessions prior to the latest one.

“Investors anticipate what’s going to happen (in a recovery), and sometimes they over-anticipate,” Stovall said. After a couple of quarters pass, investors go through a “reality readjustment.”

And apparently they’re still not through at that point: Prices also tend to fall in the fourth quarter after recessions end, though Stovall cautions his data is more a curiosity than conclusive.

The quarter’s final day saw a last-hour sell-off that has become standard operating procedure, especially when a big economic number like the government’s June employment report due out Friday is imminent.

Karl Mills, chief Investment officer at money manager Jurika, Mills & Kiefer, pointed to a lack of buyers in the market that forced sellers to keep lowering their prices.

“No one wants to be a hero. Everyone is looking to employment numbers coming out Friday,” he said.

The Dow fell 96.28, or 1 percent, to 9,774.02. The Standard & Poor’s 500 index fell 10.53, or 1 percent, to 1,030.71, while the Nasdaq composite index fell 25.94, or 1.2 percent, to 2,109.24.

As the third quarter starts, the focus will be on the upcoming jobs report and, in the weeks ahead, companies’ second-quarter earnings reports and forecasts for the coming quarters. Any disappointments are likely to keep sending stocks lower.

On Wednesday, ADP said private employers added just 13,000 jobs in June. That’s well short of the forecast of 60,000 from economists polled by Thomson Reuters. The ADP report is often seen as a precursor to the government’s jobs report.