Friday's sell-off was spurred by a disappointing Commerce Department report showing a 0.5 percent drop in consumer spending last month. The bad news was further bolstered by a University of Michigan survey that showed Americans were less optimistic about the economy in October than in the previous month. Stocks reacted dramatically, erasing all gains made Thursday, when markets rallied in response to a strong third-quarter GDP report.
October is typically a dreaded month on Wall Street, with specters of a succession of "Black days," the first four appearing in 1929, marking the beginning of the Great Depression, and a second Black Monday in 1987, that saw the Dow Jones industrial average ($INDU) lose nearly 23 percent in value on Oct. 19 that year.
The financial crisis that became full-blown after Lehman Bros. collapsed in September last year led to another nasty October in 2008. Nothing nearly so traumatic has happened this year, but the volatile swings in stock values have shaken investor confidence, leaving many to question whether the gains made since the lows of March are rooted in strong fundamentals.
The Dow industrials, for example, had no fewer than 10 days this month of triple-digit gains or losses. At the close today, the benchmark index was down nearly 250 points to 9,712, well below the much hallowed 10,000 level it had managed to recapture earlier in the month -- to much acclaim.
How Real Are Recent Gains?
Analysts were torn over whether Friday's pullback was a reaction to overinflated stocks values or rising concern that U.S. consumers, who account for the lion's share of the nation's economic activity, are yet ready to begin spending again. After the S&P 500 index ($INX) gained more than 18 percent since April, Steven Ricchiuto, chief economist at Mizuho Securities USA, told the New York Times that investors were dubious whether such gains were real.
"The question is whether that is a real snapback, or temporary," said Ricchiuto. "Today is a day of real consolidation to see where the market strengths and weaknesses are."
Within individual stocks, big losers Friday included CIT Group Inc. (CIT), which fell more than 20 percent as fears swirled about looming bankruptcy. Billionaire investor Carl Icahn stepped in to support a prepackaged bankruptcy plan, supplying a $1 billion credit line to provide additional liquidity for its restructuring, the company said in a statement.
Shares of Citigroup Inc. (C) fell nearly 6 percent on comments by analyst Michael Mayo of CLSA on cable-news network CNBC that the bank might have to write down some $10 billion in deferred taxes in the fourth quarter.
Citigroup took exception to Mayo's estimate, CNBC reported. "We have no idea how any analysts have gotten to this estimate," the cable network quoted Citigroup spokesman Stephen Cohen saying. He added the bank wouldn't comment further.
Apple Inc. (AAPL) fell nearly 4 percent as Wall Street questioned whether the iconic computer maker didn't misstep in beginning to sell its popular iPhone in China by overpricing it. PC World reported that iPhone sales got off to a slow start Friday night in Beijing.
This October may have another been spooky one for investors, but November frequently brings calmer markets. Wall Street can only hope that by Thanksgiving there will be more feast than famine.