Stocks Plunge on Global Slowdown Fears

Last Updated Sep 22, 2011 4:34 PM EDT

For the second day in a row, nervous investors dumped stocks Thursday because of what everyone already knows: Economic growth across the globe is slowing and Europe is a mess. Did we really need the Federal Reserve to tell us these known facts?

The Dow Jones Industrial Average fell as much as 527 points during the day before recovering to a more modest -- but still eye-popping -- drop of 391 points. Evidently, when the Fed acknowledges "significant" downside risks to the economy and "strains" in global financial markets (a nice way of saying that Europe is a mess), fear-based selling takes over.

Here's how the U.S. markets ended the day:

  • DJIA:10,734, down 391, or 3.5% (52-week low: 10,604 on 8/9/11)
  • S&P 500: 1,130, down 37, or 3.2% (52-week low: 1,101 on 8/9/11)
  • NASDAQ 2,456, down 82.52, or 3.3% (52-week low: 2,316 on 9/23/10)
  • US 10-Year Bond: 1.72% (lowest since the 1940's)
  • November Crude Oil: $80.51, down $5.41, or 6.3%
  • December Gold: $1,723.20, down $66.40, or 3.4%
After Wednesday's FOMC announcement, U.S. investors pushed down stocks; then the selling accelerated overnight in overseas markets. The Stoxx Europe 600 tumbled 4.4 percent to its lowest level in more than two years in intraday trading; China's Shanghai Composite lost 2.8 percent, after a disappointing report on Chinese manufacturing was released; and Hong Kong's Hang Seng Index plummeted 4.8 percent.

Before the U.S. markets opened, the New York Stock Exchange invoked "Rule 48," a measure that limits the amount of information that's released about stock trades. It's designed to make trading easier and faster, and is only used on days when extreme volatility is expected. Today certainly qualified.

The Fed's downbeat economic assessment trumped its new policy announcement, known as "Operation Twist". The central bank will "twist" $400 billion dollars worth of its shorter term treasury bonds for longer term ones, in an effort to make credit cheaper and spur spending and investment. Here's a quick primer on the Fed's strategy (cue the Chubby Checker music):

The announcement did push down interest rates, but investors are left wondering: so what? After all, rates have been low for more than a year and consumers haven't nibbled because they are still busy paying down debt and beefing up their savings. Meanwhile, companies are sitting on $2 trillion in cash because they're worried economic growth is too slow to justify making any big investments or hiring more people.

This vicious cycle has kept the economy boxed into a slow growth recovery, with little hope for a substantive change on the horizon. That means that investors are left swinging between bouts of fear and greed. Today, fear is winning the battle.

But as Warren Buffett likes to say, we need to "be greedy when others are fearful". Here's how you might be able to channel some greed today:

  • Mortgage rates are sinking -- a mortgage broke just told me he locked in a client at 3.85 percent for a 30-year fixed rate loan - WOW!
  • If you are a retirement plan participant, you are buying shares at lower levels-automatic investing is forcing you to buy low
  • As always, a well-diversified, balanced portfolio will help shield you from the extreme volatility
AP Contributed to this report
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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.