The sell-off on Wall Street intensified yesterday, sending the Dow Jones industrial average down more than 700 points after grim retail-sales data stoked fears that a punishing recession may be looming - if not already under way.
The 8 percent plunge pushed the Dow back below the 9,000 level and erased most of the remaining gains from Monday's torrid 936-point rally. A government report that retail sales slumped 1.2 percent in September - far worse than the 0.7 percent that economists had expected - provided the spark for the sell-off.
The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy after stepped-up government efforts to revive the stagnant lending markets.
"Even though the banking sector may be returning to normal, the economy still isn't. The economy continues to face a host of other problems," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "We're in for a tough ride."
Fed Chairman Ben S. Bernanke offered a similar opinion, warning in a speech yesterday that patching up the credit markets won't provide an instantaneous jolt to the economy.
Bernanke also offered hints during the luncheon speech to the Economic Club of New York that further interest rate cuts could be in the offing. Investors may have been focusing more on Bernanke's comment that even with the financial rescue plan launched by governments around the world, a "broader economic recovery will not happen right away."
"I believe the economy is now in a recession," said Richard DeKaser, chief economist at banking company National City Corp. in Cleveland. "What today's retail sales report implies is that it will be steeper than many of us had feared."
The Dow fell 733.08 points, or 7.9 percent, to 8,577.91. The broader Standard & Poor's 500 index fared even worse, losing 90.17 points, or 9 percent, to 907.84. The tech-heavy Nasdaq composite index slumped 150.68 points, or 8.5 percent, to 1,628.33.
The slide meant that the Dow, which fell 76 points Tuesday, has given back all but 127 points of its record 936-point gain of Monday, which came on optimism about the banking system in response to the government's plans to invest up to $250 billion in financial institutions.
Halfway through October, the Dow has risen only one day so far this month, and that was on Monday's record surge. It has lost ground in 11 of the past 13 sessions.
Even as fears about the financial system quieted after the government's plan to inject capital directly into banks, the retail data demonstrated the difficulty that stocks may face in the coming months as investors confront what is likely to be a torrent of depressing economic news.
The Fed's latest "beige book" snapshot of business conditions around the nation showed the economy continued to lose traction in the early fall, reflecting mounting damage as financial and credit problems deepened. Economic activity weakened across all of the Fed's 12 regional districts, according to the report, released shortly after Bernanke's speech.
Many investors remain wary of the market because they have no idea how bad the global economy will become, and they are more uncertain than ever about the outlook for corporate profits.
On a positive note, the credit markets appeared to be thawing, albeit moderately.
The yield on three-month loans between banks eased to 4.55 percent, from 4.64 percent Tuesday, the fourth straight daily drop.
Japan's key stock index plunged more than 10 percent in early trading today. The benchmark Nikkei 225 stock average nose-dived a staggering 986 points, or 10 percent, to 8,562.