This week could mark the end of the bull market for Wall Street, with US stocks likely to join a global equity market plunge triggered by fears of a US recession.
Growing fears of a US recession and increased worries about the outlook for the financial sector triggered a rout in Asian and European equity markets yesterday.
Many indices suffered their biggest one-day declines since September 2001.
Wall Street was closed for the Martin Luther King Jnr Day holiday, although the futures market pointed to steep losses for the S&P 500 and Dow Jones Industrial Average when trading resumes today.
Investors said last week a $150 billion White House rescue plan was too little too late, as more and more data signalled the US economy was headed for recession.
If US stocks open at the levels futures were indicating, it would push major indexes dangerously close to bear market territory - or a 20 per cent drop from their peak in October. That would mark the death of the bull market that was born in early October 2002. The turmoil comes as a group of the world's leading economic commentators gather at Davos in Switzerland to discuss global finance, economics and business.
A year ago at the same forum, Jean-Claude Trichet and Lawrence Summers accurately warned investors about being too complacent. Now they see an erosion of confidence that threatens to paralyse the global economy. Former US treasury secretary Mr Summers returns to Davos this week urging quick action in the form of economic stimulus to head off "a cascading loss of confidence" in the US economy after the collapse of its housing market.
European Central Bank president Mr Trichet, also travelling to the Alpine retreat, is leading international colleagues in lending emergency cash to banks.
"When you have recessions from bubbles bursting, they tend to be protracted," said Mr Summers, a Harvard economist and the university's former president.
"There is the possibility, not yet at all the probability, that a recession could prove long and severe."
As the hubris that Mr Trichet and Mr Summers decried last year is replaced by alarm, an aversion to risk-taking may worsen the outlook for the world economy.
"Davos was marked last year by an irrational exuberance," Josef Ackermann, chief executive officer of Frankfurt-based Deutsche Bank AG, Germany's largest bank, said yesterday.
"I hope that we don't swing to the opposite this year and give in to an irrational depression."
In the past 10 days, Citigroup cut 4,200 positions after its biggest quarterly loss ever, German investor confidence fell to the lowest level since 1992 and the first signs emerged that China's economy may be slowing. - ( Additional reporting, Financial Times service, Bloomberg)
