4 Reasons the Markets Tanked

A round of bad economic news, plus the prospect of more to come, scared off investors.

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Ed Sweeney, right, of Lehman Brothers Market Makers talks to a colleague on the floor of the New York Stock Exchange, Friday, Feb. 29, 2008.

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The markets finished off the week by handing investors a serious beating, as the Dow fell 315 points, the Nasdaq 60, and the S&P 500 37 on Friday. Here are four reasons behind the steep decline:

The economy: Friday’s economic news was roundly awful. The Chicago Purchasing Managers Index for January fell sharply to 44.5 from 51.5, the lowest level since the 2001 recession.  Disappointing factory data capped a week that included worrying reports of higher inflation and a new low for the dollar, which hit $1.50 against the euro earlier in the week and kept falling. Business confidence is slipping, and the factory sector is expected to continue contracting. “People want to debate whether we’re in a recession or not. It’s an irrelevant debate. Either way, the economy is barely growing, and it’s a question of how long this lasts and how deep it gets on the downside,” says Peter Boockvar, an equity strategist at Miller Tabak.

The consumer: Data also showed an increase in consumer spending during the month, but spending continues to struggle mightily. Adjusted for inflation, spending was flat, as it has been in three of the past four months. Merrill Lynch called that “stall speed” as consumers wrestle with record energy prices, market turmoil, and worrying signs of inflation. The latest Reuters/University of Michigan consumer confidence survey fell to its lowest levels since 1992, and the report noted that “past declines of this magnitude have always been associated with a subsequent recession.” The index has fallen 30 percent from a January 2007 peak.

Poor earnings: American International Group posted its largest-ever quarterly loss of $5.3 billion, driven by a huge write-down partly linked to subprime mortgages. Meanwhile, computing giant Dell saw its fourth-quarter profit slide 6 percent and suggested that information-technology spending in the United States could be slipping. The news sent shivers through an already jittery market.

More bad news to come? Investors got a bucket of cold water from a UBS report suggesting that losses linked to the global credit crisis could exceed $600 billion. To date, financial firms have recorded a painful $160 billion or so. But if the report is correct, the industry’s pain is just getting started.

"Whether it's the AIG news, another day of huge selling in the municipal bond market . . . or the banks getting killed over the last few days, it's all credit concerns," Boockvar says. Yields on tax-free municipal bonds have climbed steadily the past two weeks as buyers shun the sector.