Stocks plunge to 2011 lows on Japan crisis

By Abby Schultz, Special to CNBC.com

Stocks fell to the lows of the year on Wednesday in a volatile session driven by fears stemming from Japan's nuclear crisis.

The Dow Jones Industrial Average fell 242.12 points, or 2.04 percent, to close at 11,613.30, the blue-chip index's lowest close for the year. At its worst point on Wednesday, the Dow slid 300 points.

All Dow components sank, led by IBM, General Electric and American Express.

The S&P 500 fell 24.99 points, or 1.95 percent, to close at 1,256.88, its lowest close for the year.

The Nasdaq also fell to its 2011 lows, sinking 50.51 points, or 1.9 percent, to close at 2,616.82.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, skyrocketed more than 20 percent to above 29, after shooting more than 25 percent higher earlier.

Among key S&P 500 sectors, technology, industrials and financials skidded.

Stocks initially rallied off the lows of the session after news reports that Tokyo Electric Power almost completed a power line that could restore electricity to the stricken nuclear power plant and potentially solve the immediate crisis.

The power line to Fukushima Dai-ichi is almost complete, an official at the Tokyo Electric Power Co. said, according to the Associated Press. Officials plan to try it "as soon as possible" but he could not say when, the AP reported.

The power line would allow officials to use electric-powered pumps to maintain a steady water supply to the plant, including the troubled storage ponds.

Earlier, the market fell to the lowest levels of the year after the U.S. Secretary of Energy told Congress he believes a "partial meltdown" did occur in Japan, but that it "doesn't mean the containment" system will fail.

U.S. Energy Secretary Steven Chu's comments that he believed there had been been a "partial meltdown" at the Fukushima Nuclear Power Plant was before the House Energy & Commerce subcommittee on Wednesday. Chu said the situation was more serious than Pennsylvania's Three Mile Island nuclear accident, the worst in U.S. history.

The market initially fell sharply after news circulated that European Union's energy leader last night warned of a further catastrophe at Japan's nuclear site in the coming hours. But while the market regained some ground after a spokeswoman for the energy minister said he had no specific information, it quickly lost it as trading continued.

The sharp downdraft reflects the fact there is "no depth to the market," said Brian Battle, vice president of trading at the Chicago-based Performance Trust Capital Partners.

"Nobody is betting either way, going long or short," Battle said. "We’re going to have to get used to that until we know what’s going on in Japan is clear."

Another trader also cited the lack of liquidity in the market, and said the freefall in the market came after the S&P 500 fell below 1,260.

For now, the news out of Japan remained fluid and uncertain, as officials continued to battle the disaster. Foreign bankers, meanwhile, fled Tokyo to avoid the escalating crisis.

Investors were also focused on events in the Middle East after Bahraini police cleared rotesters from a central roundabout that had become the symbol of an uprising by the island's Shi'ite Muslim majority.

London Brent crude rose above $110 a barrel, while U.S. light sweet crude rose above $98 a barrel. Also, the government reported Tuesday that crude oil inventories in the U.S. rose to 1.75 million barrels, while gasoline inventories fell by 4.2 million barrels.

The dollar reversed course and gained slightly against a basket of currencies, although it reached a 16-year low against the Japanese yen.Gold, meanwhile, gained slightly, closing at $1,396 an ounce.

The market was also concerned on Wednesday with news closer to home, as tech giants IBM and Apple both suffered downgrades. IBM's declines followed Bernstein's downgrade of the stock to "market perform" from "outperform," although the brokerage raised its price target on the stock to $173 a share from $170. Bernstein said expectations for gains in IBM's earnings per share are already reflected in the stock.

Apple, meanwhile, fell after JMP Securities downgraded the iPad maker to "market perform" from "market outperform," based on "deceleration" in sales among a key Apple manufacturing partner, Hon Hai, that has only gotten worse since the disaster in Japan.

The downgrades "just lead you to believe the market will have a tough time rallying," said Rick Fier, an equity trader at Conifer Securities.

While the focus has been on Japan, market participants are more concerned with the events in the Middle East and its affect on oil prices, Fier said.

These events, however, are excuses for a market that had risen steadily for several months to finally pause, he added, saying he wouldn't be surprised for stocks to remain within a trading range for four or five months. As a result, investors will make money more by trading individual stocks, than as a result of the market just going up day after day.

"You need to trade now more than ever," he said.

Other big tech names dropped as well out of concern they could suffer from component shortages as a result of the crisis in Japan. Google, Microsoft and Oracle all sank.

Toyota Motors slipped on Wednesday after news it would restart production of spare parts at seven plants in central Japan, but would keep its 12 main assembly plants shuttered until March 22.

Meanwhile, GM shares also declined despite an upgrade by S&P Equity to "strong buy" from "hold," saying the once-bankrupt automaker will benefit from rising global industry sales in 2011.

Among insurers, Aflac fell despite an upgrade by Deutsche Bank to "buy" from "hold", saying the stock was beaten up more than warranted since Japan's earthquake and tsunami. Aflac's shares have plunged 9 percent because of the company's significant exposure to Japan. But Deutsche Bank said Aflac's losses due to the tragedy "would be less than two quarter’s worth of capital generation." The brokerage has a $60 price target on the stock.

Among energy stocks, some fossil fuel producers gained as investors expect they will benefit from fears over the safety of nuclear power plants in the wake of the nuclear disaster in Japan, although the sector was broadly lower. Some of the gainers included Peabody Energy, Range Resources, Consol Energy and Southwestern Energy.

Treasurys rallied more than a point, sending the yield on the benchmark 10-year Treasury note to 3.2 percent.

Investors also put money into exchange-traded funds that offer portfolio protection. ProShares UltraShort S&P 500 and the iPath S&P VIX Short-Term Futures both gained.

In U.S. economic news, Producer Price Index rose a seasonally adjusted 1.6 percent in February, up from 0.8 percent the month before, the Labor Department reported. The core PPI, excluding food and energy costs, rose 0.2 percent from a 0.5 percent gain the month before.

Meanwhile, the housing sector was hit with bad news as starts fell 22.5 percent to an annual rate of 479,000 units, the biggest drop in 27 years, the Commerce Department reported. Building permits sank to 517,000 units from a revised 563,000, a 20 percent drop from February 2010.

Also, the Mortgage Bankers Association's seasonally adjusted index of mortgage application activity fell 0.7 percent as home purchases slowed for the week ended March 11.

In Europe, Moody's Investors Service downgraded Portugal's debt rating by two notches to A3, citing high borrowing costs.

The move, as well as the crisis in the Japan and events in the Middle East, sent European stocks lower for a sixth straight session.