Weighing on the market is also the prospect that on Friday the Department of Labor will report that the July employment numbers are disappointing. While some of the market's decline previous to Thursday was attributed to concerns over the debt-ceiling negotiations in Washington, analysts did not cite that as a factor in the one-day plunge.
The turmoil in the markets puts an onus on the Federal Reserve, which meets next week to set short-term interest-rate policy. Although the Fed was silent on Thursday, some stock market observers wondered if Fed Chairman Ben Bernanke might be forced to provide some assurance to markets. The Fed could do this by agreeing to backstop European banks or make a surprise announcement that it would resume buying long-term US securities, a stimulus program it just ended in June.
“The risk to the US economy is that corporate leaders and consumers looking at the stock market as an economic bellwether see stocks plunging and suspend small and large buying plans,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “Then we would have economic fallout in the US.”
Although the stock market can be a predictor of economic slack, it is not always accurate, notes Sam Stovall, chief investment strategist at Standard & Poor’s in New York. “There have been 54 market declines of 5 percent or more since World War II but only 12 recessions,” says Mr. Stovall.