President Barack Obama yesterday told Americans that his inauguration symbolized "hope over fear," but on Wall Street, investors stuck with fear.
The Dow Jones industrial average plunged 332.13 points yesterday to close below 8,000 for the first time since the end of November as the largest US banks continue to bleed cash and the Congressional Budget Office casts doubt on the effectiveness of an $825 billion proposal to spend the nation out of recession.
The Dow, which ended at 7,949.09, lost 4 percent of its value, the worst Inauguration Day loss in the 113-year history of the index.
Other indexes suffered steeper losses. The technology-heavy Nasdaq Composite shed nearly 6 percent, or 88.47, to close at 1,440.86. The Standard and Poor's 500 lost more than 5 percent, or 44.90, to end at 805.22.
The sell-off in stock markets, the worst so far this year, began before Obama took the oath of office at about noon. The rout underscored the depth of a recession that many economists expect to be the worst since the Great Depression, and the challenges inherited by Obama.
In the nearly three months between his election and the inauguration, the economy shed more than 1 million jobs and the number of unemployed surpassed 11 million. And despite the injection of $350 billion by the Bush administration to shore up the nation's banks and encourage more lending, the US financial system continues to teeter.
State Street Corp., of Boston, last week warned that it faces $9 billion in investment losses, while an analyst's report yesterday estimated that Bank of America, which recently reported its first quarterly loss in 17 years, needs to raise about $80 billion to bring its capital to adequate levels. Struggling Citigroup cut its dividend to 1 cent per share.
State Street's stock price plunged 59 percent yesterday to $14.89, the lowest since 1996. Bank of America shares lost 29 percent, and Citigroup's, 20 percent.
"It's ugly out there, and I don't know any other way to say it," said Ben Branch, a finance professor at the University of Massachusetts at Amherst. "Who knows when we're going to hit bottom."
Many analysts say fixing the banking system is critical to turning around the economy. Lenders, fearful of losses and hoarding cash to survive, are reluctant to lend. That is making it harder for consumers and businesses to borrow and spend, which fuels economic growth.
Jim Weiss, president of Weiss Capital Management in Concord, said federal initiatives have yet to address the underlying problem: confidence. Investors and lenders still don't have a good idea of how much financial institutions hold in troubled assets tied to battered US housing and mortgage markets. It was exposure to those assets, such as securities backed by risky mortgages that ultimately fell into default, that sparked the financial crisis more than a year ago.
"There is an utter lack of transparency in the financial statements of banks, brokers, and insurance companies," Weiss said. "We still can't get our arms around the dimension of the problem."
Also yesterday, a study by the Congressional Budget Office concluded it could take years for proposed spending in the recently unveiled stimulus package to boost the economy. For example, the budget office estimated that only $26 billion of about $300 billion proposed for highway and other public works projects would be spent this year, when the economy needs it the most.
"The message from Wall Street is 'Show me,' " said Allen Sinai, chief economist at Decision Economics, a Boston financial markets advisory firm. "Stimulus heavily oriented towards government spending has a checkered history."
Material from Globe wire services was used in this report. Robert Gavin can be reached at email@example.com.