When the Federal Reserve issues a statement warning about “significant downside risk” to the global economy, you don’t have to be Warren Buffett to guess what happens next – stock prices are going to take a dive.
And so they did. By the end of Wednesday trading, the Dow Jones industrial average had fallen 391.01 points, or 3.51%. The S&P 500 and the tech-heavy Nasdaq Composite Index had each plunged more than 3% as well.
The faint hope of investors that the U.S. could still avoid a double-dip recession is fading fast. Mohamed El-Erian, the co-chief executive of the Pacific Investment Management, is quoted by Bloomberg News as saying that the world was on the eve of its next big financial crisis with “sovereign debt at its epicenter.” He is hardly alone with his start warnings.
Robert Zoellick, the head of the World Bank, today argued that the world economy was in a “danger zone” from which not even emerging market economies, growing faster than developed ones, would be able to escape.
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“I still think a double-dip recession for the world’s major economies is unlikely, but my confidence in that belief is being eroded daily,” Zoellick is quoted by Dow Jones Newswires as saying.
IMF head Christine Lagarde also chimed in, saying that the crisis in the U.S. and Europe had the potential to drag down the entire world economy. In a press conference, she added that the “path to recovery is narrower than it was three years ago.”
The downward spiral in stocks came one day after the Federal Reserve announced a $400 billion program to jumpstart the economy in which it would sell some short-term treasuries and buy some long-term ones in order to keep interest rates low. Wall Street is pessimistic that the plan it has dubbed “Operation Twist” will work. In fact, respondents to a Reuters poll give it a 15% chance of working. Their pessimism is understandable given that keeping interest rates low doesn’t seem to have helped the economy so far.
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Oliver Pursche, manager of the GMG Defensive Beta Fund, has an even more clever nickname for the Fed plan than Operation Twist: The Kardashian, as in reality star Kim Kardashian, star of “Keeping Up With The Kardashians.”
“The idea came from seeing my wife read a magazine article about Kim Kardashian,” Pursche tells TheStreet.com. “She’s inexplicably popular, fairly useless and all about the back end. And that sums up Operation Twist pretty well.”
Nicknames aside, there are plenty of reasons to worry. Holiday retail sales may have their slowest growth in two years. Unemployment remains stuck above 9% and more Americans than expected filed for first time unemployment claims last week. To make matters worse there is a potential for gridlock to return to Congress. House Republicans are struggling to overcome the opposition to a spending bill to fund the government through November, which includes providing relief to people affected by recent natural disasters.
About the only positive news today was Speaker John Boehner’s statement saying that he didn’t think the newest political kerfuffle would lead to a shutdown. But as with anything else related to the economy, people will believe it when they see it
Follow Jonathan Berr on Twitter @jdberr.