Stocks slump on sequestration, Italy fears

The Dow falls 216 points in its worst day since November, as investors worry that spending cuts will harm the economy. The Italian election, meanwhile, unsettles those who thought Europeans were getting their act together.

By Charley Blaine Feb 25, 2013 5:53PM
When Monday began, a lot of investors and traders could be excused for thinking the stock market was holding up quite well -- considering the worries about cuts in federal spending and a resumption of worries about political and economic instability in Italy.

But the stock market slid during the day, and then just plain tanked. The Dow Jones Industrial Average ($INDU) closed down 216 points to 13,784, its worst loss since Nov. 7. Those cheery feelings about the resilient market? Gone.

The Standard & Poor's 500 Index ($INX) fell 28 points to 1,488, that exchange's worst loss since Nov. 7. And the Nasdaq Composite Index ($COMPX) dropped 46 points to 3,116, the worst loss since Wednesday.
Italian voters appear to have knocked Prime Minister Mario Monti out of office and brought back, at least as a power broker, former Prime Minister Silvio Berlusconi. The often controversial Berlusconi has vowed to undo many of the austerity measures enacted to get Italy some needed help with its massive debt.

And Berlusconi has a less-than-savory reputation. He was indicted on corruption charges and is notorious for womanizing. The markets, meanwhile, aren't happy. The iShares MSCI Italy (EWI) exchange-traded fund, which invests in Italian stocks, was down 71 cents to $12.23 late Monday afternoon. The ETF is down nearly 16% since it became apparent in late January that Berlusconi's prospects were much better than anticipated. © Antonio Calanni/AP Photo

It's not clear if Berlusconi will take power again. In fact, the big problem is that it's not clear just who will be in charge.

Back home, another big reason for the market's pullback, according to Hugh Johnson of Hugh Johnson Advisors in Albany, N.Y., is the realization that sequestration is going to set in, producing spending cuts across the federal government.

The market already was already pricey, Johnson said Monday, with the S&P 500 overvalued by as much as 6.3% over where it should be. The big gains in January were too much, too fast, and, with today's big loss, the index is now down 0.7% for February. The Dow, meanwhile, is off 0.6%, while the Nasdaq is down 0.4%. 

Johnson's estimate comes from measuring earnings and price to earnings ratios, to come up with what he calls a "fair value" for the index.

For the the market to move higher required, as he put it, "everything has to go right."

But it isn't. Sequestration looks like it will drag on for months -- and if it goes to the end of the year, it could knock a half-percentage point out of the economy, maybe more. Some 791,000 federal employees have been told they may be furloughed and see their salaries cut by 20%. An additional 46,000 temporary workers have been laid off.

It means companies like Boeing (BA) will continue to build F-18 jets, but the government will delay buying engines for them. It means cuts to education, Medicare, basic health research, and reductions in other programs and services.

Boeing, one of the three largest defense contractors, was down $1.42 to $75.24 this afternoon.

Jeffrey Saut, the chief investment strategist at Raymond James & Associates, thinks the market slump will be short-lived, maybe to the end of March, because he thinks Republicans and Democrats will find a way to a solution. It may not be a pretty solution, but it will happen.

But getting there means a short but nasty pullback, he said Monday, perhaps 5% to 7%.

Like Johnson, Saut believes the market has gotten ahead of itself. There were 37 straight sessions where the S&P 500 avoided a 1-to-3 day pause or pullback. The last time that happened was in the summer of 1987 -- which was followed by the horrific October 1987 crash.

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78Comments
Feb 25, 2013 6:24PM
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I guess the italians did not want to be outdone by the Americans who also elected a worthless president.
Feb 25, 2013 6:47PM
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Today's stock market reaction is proof that the whole system is completely dependent upon perpetual government deficit spending and money printing. This system is surely bound to fail.

Feb 25, 2013 6:45PM
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Given the opportunity to work or stay on the dole, the Italians will stay in lockstep with the Greeks, and the Frogs.  A look into our future as well.
Feb 25, 2013 6:49PM
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No big frigging deal. If the Obama hatched plan goes through, only 45 billion in spending cuts will happen this year. Congress just recently approved 50 billion in hurricane Sandy relief & no cuts, no panic, no nothing.
Obama is crying out & lying through his teeth just to keep his spending frenzy intact. Remember this: Communism breeds on insurrection & Obama is frantically providing that scenario.
Feb 25, 2013 6:30PM
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Proof once again, that if you want to make money in the stock market, short sell any advice from Jim Cramer.

Just the other day on one of the sunday morning poltical shows, he was saying that the proof that the worry and hype over sequestration is over-blown, is that it hasn't affected the stock market.

Feb 25, 2013 7:17PM
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The debt problems in Europe were never fixed, only covered up long enough to make many people in the USA forget about the issue.  The same problems exist in Europe, they're only worse now.  Pretty similar to what we've got going on over here - $16.6 trillion in debt and counting.
Feb 25, 2013 6:43PM
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Odumba, reid, that pill lady will tax and spend the US to a developing naton status.  I think Odumba wants the US to reach "fatherland"  status (Kenya).
Feb 25, 2013 7:02PM
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I am so sick of hearing the stock market going up and down because of European woes or some other stupid ****. The big names you know who they are run the stock market somehow when these kind of things happen they make money you would I lose our asses. I feel the stock market is corrupt. 2008 2009 when the working class blue-collar whatever the hell you want to call us lost our asses 401(k)s annuities, IRAs and pretty much everything controlled by the stock market. It's taken years to almost get back what you had invested. But the golden boys had their money back a year to later and have been making money hand over fist ever since. Another thing is related to this post is oil prices supposedly dropping so people won't have to take a second will mortgage every time they fill their car up. Why the hell are we paying so much for oil anyway I would say the Middle East should be sending tankers full into our ports for free so they can somehow pay back trillions of dollars that have been spent along with thousands of lives that have been given to try and make those sandbox countries livable.
Feb 25, 2013 6:52PM
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a society of criminals...not the italians    the stock market
Feb 25, 2013 7:54PM
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The market didnt fall on Sequester fears. The market was up for much of the morning, then fell after the Italy elections returns came in. MSM is lying and are liars trying to force a compromise in the sequester so the GOP votes for a tax increase.
Feb 25, 2013 6:54PM
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The GOP might as well walk out, as they have nothing to lose, because the Dems will sweep the congressional elections next year.  One of the last straws for anyone sensible observing the demise of the Republic is the latest concession to the union which helped bring about the extinction of Hostess and the Twinkie.  So Boehner should use what powers of persuasion he can summon and tell Obama we don't bow to hypocrisy and bull crap.

Feb 25, 2013 7:32PM
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ITALYs PROBLEMS SHOULD AFFECT THE MARKETS AT MOST 20 POINTS. TODAY INVESTERS WERE TAKEN DOWN BY WALL STREET MANIPULATION. THE GAME GOES ON WITH WHO CONTROLS THE MARKETS!!!
Feb 25, 2013 7:30PM
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House of cards!

 

Is anybody really surprised?

 

Spend it while you got it!

Feb 25, 2013 7:30PM
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Looks like the big sell off was done in the last 1/2 hour!  Typical W/S Bull Crap!!!!!!!!!!!!
Feb 25, 2013 7:28PM
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Back to the Italian Bull Crap again!!!!!!!!!  Wall Street worries more about the European Market then they do about the U.S. Market.
Feb 25, 2013 7:46PM
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Why would what happens in fuking Italy make our market go down. I want to be the idiot that gives the reason for the market going up or down. The fact of the matter is that the market is doing well because there's no place else to put your money. What 1% cd's, how about real estate, gold, silver? Come on
Feb 25, 2013 7:58PM
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This story about Italy should not even be a headline in tha news today . A non event at the most!!!
Feb 25, 2013 8:05PM
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"Calm down all of you day traders; the market will correct 10% from these levels, by June, creating one heck of a buying opportunity."

 

Tim - the problem is, everyone is tiring of the market climbing to 13000, then back down to 6000...then back up to 13000, then back down to 6000

 

In essence we haven't budged an inch in over a decade.

Feb 25, 2013 7:11PM
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Well what else can happen these last few months with the stock market going up and down some ****head running their mouth of what they speculate. And oh yeah got the gun control Nazis that want to take weapons away from law-abiding citizens that want to protect themselves from people who are not law-abiding, that  will just buy their guns in a dark alley. It sounds like I'm pissed off, I am tired of working my **** off and just scraping by. Our government needs to get involved in problems right here in United States and let these third world countries collapse on themselves. Will again sorry about going off on other crap that wasn't related to this particular form
Feb 25, 2013 7:09PM
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Wall St. can't get it right? Hey, with debt growing by the trillions a year, the meager cut backs in spending that sequestration brings is a drop in the bucket, but the right direction. We have to get this under control! So, too bad federal employees. I guess you will have to get honest jobs! Hell, America re-elected O, what is so bad about bringing the Italian Stallion back in?

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