Sharp Decline in Stocks Reflects Investors' Greater Aversion to Risk
Signs of sluggish growth at some top companies, hints of a flagging consumer, fresh fears of oil-price damage to the global economy -- all these are contributing to a retreat from risk in financial markets.</br></br>The Dow Jones Industrial Average last week recorded its steepest declines since 2003. It dropped 3.6% for the week to close Friday at 10087.51, 7.8% below its 3 1/2-year high reached on March 4. The Nasdaq is off 11% from a peak hit in December. And Treasury bonds, despite inflation worries, have rallied as nervous investors seek out safety from tumbling stocks.</br></br>In recent months, investors had grown surprisingly complacent about taking on risk, and indicators reflected a remarkable calm concerning potential market mayhem. But that has changed.</br></br>High oil prices, a widening U.S. trade deficit and the Federal Reserve's new concern over inflation have all chipped away at the calm mood in the financial markets. Over the weekend, finance ministers of the Group of Seven major industrial economies, meeting in Washington, expressed concern about oil prices and noted that the global economy's "expansion is less balanced than before." They also warned of the "potential for a sharper-than-expected rise in long-term interest rates" and currency volatility.</br></br>Cracks in the bull market and in investor complacency first appeared in mid-March when General Motors Corp. issued a stark earnings warning. Its shares plunged and its huge debt traded sharply lower. Ford Motor Co. earlier this month joined GM in expressing doubts about future performance. At the same time, corporate turmoil, such as the investigations into insurance giant American International Group, has resuscitated concerns about corporate behavior. Then on Thursday night International Business Machines Corp. reported its first-quarter numbers early. And they were far worse than anticipated.