Spooked by reports of more government probes and weak earnings prospects, investors dumped stocks in a huge sell-off yesterday that sent the Dow Jones industrial average plummeting below the 8,000 level and capped off the market's worst two-week performance since 1987.
The Dow index of 30 large companies smashed through its post-Sept. 11 low and sank to 7,961.72 minutes before the 4 p.m. close. It regained enough ground to end the day at 8,019.26, down 390.23 points, or 4.64 percent. The Dow had closed at 8,235.81 on Sept. 21.
The index is down nearly 20 percent this year and is heading toward a third consecutive year of losses. In the past two weeks alone, it has lost 15.1 percent of its value, its worst showing since the two-week period from Oct. 12 to Oct. 23, 1987, when the index fell 22.7 percent.
In the past 10 trading days, only once did the Dow close with a gain.
"It is as ugly as I have ever seen it," said Andrew M. Brooks, head of equity trading at T. Rowe Price Group Inc., the Baltimore mutual fund company. "It doesn't make a difference as to what anyone says; people are just selling stocks. We had some insanity on the upside with the Internet bubble; it feels like we have got insanity on the downside."
Other indexes followed the trend yesterday.
The Standard & Poor's 500 index, a broad gauge of the stock performance of big companies, fell 33.81 points, or 3.84 percent, to 847.75. The Nasdaq composite index, which tracks many large technology companies, fell 37.80 points, or 2.79 percent, to 1,319.15.
For the two-week period, the S&P; 500 has lost 14.79 percent, while the Nasdaq is off 9.15 percent.
Trading was heavy yesterday, with 2.7 billion shares changing hands on the New York Stock Exchange.
The Dow fell sharply from the 9:30 a.m. opening bell and never recovered. In the last half-hour losses accelerated, with the index losing as much as 442 points before punching its way back up above 8,000. Still, the close was the lowest since October 1998.
"Everything is really irrational at this point; fear has overpowered everything else," said J. Eric Leo, chief investment officer at Baltimore-based Allied Investment Advisors. "Just like we had irrational exuberance on the way up, we have the opposite now."
The market, already nerve-wracked over the stream of corporate scandals, plunged on news that one of pharmaceutical giant Johnson & Johnson's factories is being investigated by the Food & Drug Administration. Shares of the drug maker fell $7.88, or 15.85 percent, to $41.85.
DaimlerChrysler AG also revealed that the U.S. Justice Department is looking into allegations of price-fixing at its Mercedes-Benz dealerships.
"Just the hint of something and even rumors are devastating," said Marvin Kline, portfolio manager at Logan Capital Management Inc. in Philadelphia. "The whole accounting issue has made stocks with any potential accounting problems toxic."
Nervousness over forthcoming earnings reports has also rattled investors. Next week, about one-third of the companies in the S&P; 500 will report second-quarter results.
Of the 177 S&P; 500 companies that have given third-quarter earnings projections, 93 have said profits will be lower than forecast, according to Thomson First Call.
"We don't handle bad news very well these days," added Arthur Hogan, chief market analyst at Jefferies & Co., a Boston-based investment banking and institutional brokerage firm.
Experts blamed some of the volatility on quarterly expiration of stock index futures, options on those futures and common stock options, known as the "triple witch."
Also, the S&P; reconfigured its index by replacing foreign companies with domestic ones. The move caused mutual funds that mirror the index to buy the new companies and sell the outgoing ones to match.
Even good news was brushed off. The Labor Department reported yesterday that the Consumer Price Index, a key gauge of inflation, came in better than expected and barely rose.
"The sad thing is we have ignored good economic data for a while," Hogan said. "That is a sign we are clearly in a bear market."
The current bear market ranks as the second-worst in modern U.S. history, based on the percentage decline of the S&P; 500.
From August 2000 through yesterday, the S&P; has declined 43.4 percent, eclipsed only by the Great Depression, when it tumbled 83.41 percent, and exceeding the 42 percent drop during the 1972-1974 bear market.
"This is all part of the bubble. I think this is going to be worse than '74," Leo said. "The '87 crash was like being stabbed. It is the duration that really works on investors' psyche. That is what breaks this 'I have got to invest in the long term' to 'Get me out.'"
Economists and investment experts are worried that the stock market's swoon could drag the economy back into recession.
"There is no question" that it could happen, said Steve Cochrane, senior economist at Economy.com Inc., a West Chester, Pa.-based economic forecasting and consulting firm. "If investors quit investing in companies, they simply can't grow. They simply can't expand, given how broadly this sell-off seems to be."
Cochrane said that if the country slips back into a recession, it would be short because this decline is psychological, "not so much being driven by the underlying fundamentals of the economy."
John Silvia, chief economist at Charlotte, N.C.-based Wachovia Corp., said the market's decline is starting to weaken consumer confidence.
"If it [the decline] continues then, yeah, you are going to have to say that the probability of recession increases over time."
No one is sure when the slide will end.
Leo of Allied worries that nervous money managers and investors might come back after the weekend and start selling again.
"When you get liquidations like this, it sort of takes on a life of its own," Leo said. "My guess is that the bottom is not predictable."
Bloomberg News contributed to this article.