Stocks Plunge as Economic Worries Grow

Jittery investors dumped shares Tuesday, driving the S&P 500 down over 5% in the first five days of the trading year

The wintry gloom that has enshrouded Wall Street thickened on Tuesday as major indexes slumped once again. Repeated attempts by equities to rally unraveled amid mounting jitters about an economic slowdown. While further weakness in the financial sector eroded early gains but it was consumer pullback fears in the telecom industry that added fuel to the sell-off in major stock indexes.

On Tuesday, the Dow Jones industrial average finished 238.42 points, or 1.86%, lower at 12,589.07. The broader S&P 500 index was down 25.99 points, or 1.84%, at 1,390.19. The tech-heavy Nasdaq composite index dropped 58.95 points, or 2.36%, to trade at 2,440.51.

On the New York Stock Exchange, 21 stocks traded lower for every 11 that gained ground, while on the Nasdaq, the ratio was 21-9 negative.

The 5.32% drop in the S&P 500 index in the first five trading days of this year is the biggest decline since 1950, beating the 4.7% drop seen in the first five trading days of 1978.

Countrywide Financial (CFC) helped set off the weakness in financials, plunging more than 30% at one point to its lowest levels since the 1987 stock market crash on rumors that it's close to filing for bankruptcy protection. The company denied the rumors.

Morgan Stanley cut its profit estimates for Ambac Financial Group (ABK) and MBIA Inc. (MBI) on Tuesday, saying that the deteriorating credit markets are continuing to hurt the bond insurers' earnings and revenue. That sparked selling in both stocks.

The market sell-off gained momentum in the final half-hour of trading, led by AT&T (T) and other telecom names on renewed worries over softness in consumer spending. Stoking those concerns were comments by AT&T's chairman and chief executive, Randall Stephenson, about weakness in its consumer business segments driven by service disconnections due to nonpayment of its access lines and home broadband services.

The inability for the stock market to record two consecutive days of gains so far this year indicates that the path of least resistance is toward the downside, and it's hard to fight that psychology among investors, said Art Hogan, chief market analyst at Jefferies & Co. in Boston.

Among the reasons for that pessimism on Tuesday were comments by Treasury Secretary Henry Paulson, who wasn't as upbeat about the housing market as he's been in the past, and simultaneous fears about rising inflation and a slowdwon in the economy, Hogan said. A U.S. Presidential election that's wide open, where the market implications of a victory by either of the current front-runners are unknown, is also troubling, he added.

"To get two up days in a row, we need to see a day where there is no other-shoe-to-drop rumor, no Countrywide news, no negative economic data or no earnings writedown," he said. "The problem is that as we get into earnings season, it’s difficult to find that day."

Elsewhere in the financial sector, James Cayne is expected to resign as CEO of Bear Stearns, according to a Wall Street Journal report, bowing to mounting pressure from Joe Lewis, who owns a 9% stake in the brokerage firm and has lost about $200 million on his investment due to the firm's exposure to subprime mortgage-backed securities. Cayne will reportedly remain in his post as chairman of the company.

Leading this week's trickle of new economic data were U.S. pending home sales, which fell 2.6% to 87.6 in November, from an upwardly revised 89.9 in October. Sales were down in three of the four regions, led by a 13% drop in the Northeast. While the reading was slightly better than expected, sales were down 18.5% from a year ago, and suggests existing home sales will see further declines this year, Action Economics said.

The consumer credit surged $15.4 billion in November, nearly double the average forecast of $7.8 billion by economists., while the October figure was revised lower to a gain of $2.0 billion from the prior $4.

7 billion.

The increased use of debit cards and home equity loans, combined with refinancing-related paydowns, have accounted for much of the volatility and restraint in consumer credit growth over the last couple of years, despite the strength in the economy, Action Economics said. Despite high debt levels, interest rates remain low and the ongoing rise in incomes, employment, and the value of household assets leave current debt levels manageable, Action Economics said.

The consumer credit number was so "eye-poppingly different than consensus" -- raising questions about whether consumers are tapped out -- that "when it hit the tape, it got a negative reaction and accelerated the sell-off," Hogan said.

In his January Investment Outlook, published Tueday, PIMCO's Bill Gross concluded that public financing assistance "in the form of lower interest rates and increasing fiscal deficits" will be required to fill the gap created by the failed shadow banking system, which includes collateralized debt obligations and other instruments not backed by cash reserves. He repeated his prediction that the Federal Reserve will slash the Fed funds target to 3% from 4.25% by mid-2008 and also said that Congress and the White House should, but likely won't, cooperated in a tax relief program that benefits low-income homeowners.

Nor was there any comfort to be found in comments from Fed officials Tuesday. Boston Fed President Eric Rosengren predicted the longest housing decline in 50 years if the forecasts are correct and warned home prices could drop more quickly this year if the economy isn't strong, Action Economics said. Rosengren was the sole member of the Fed's policy committee to recommend easing interest rates by a half-percentage point instead of a quarter when the committee met on Dec. 11.

In his daily briefing note, Ed Yardeni, president of Yardeni Research, said a recession in the U.S. is becoming more likely, but he expects the global expansion to continue. He cited the fact that the S&P 500 financial and consumer discretionary sectors are in bear markets, posting declines of more than 23% from their 2007 peaks, while the S&P 500 Bank index is down 39.0% from last year’s peak. The S&P 500 Retailing index has fallen 20.2% from its 2007 peak.

Confidence in the sustainability of the global boom has limited losses in the Materials, Energy, and Industrials sectors to single-digit moves and Yardeni expects them to remain good bets, although "more speed bumps are likely this year than last year," he said.

Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston, said in an email commentary that while stock market participants have braced for a recession, so far the data indicates only a mid-cycle slowdown. He warned that to shift out of stocks now "may result in missing out on what has historically been a period of strong returns." But he cited the need for a half-percentage point rate cut by the Fed on or before its Jan. 31 policy committee meeting in order to prevent the mid-cycle slowdown from turning into a full-blown recession.

Oil futures rebounded after dropping by nearly $3 per barrel on Monday on speculation that U.S. crude inventories fell last week to three-year lows. The U.S. Energy Department is expected to report on Wednesday that stockpiles fell 1.25 million barrels from 289.6 million barrels last week, a Bloomberg News survey said.

February NYMEX crude oil ended $1.24 higher at $96.33 per barrel, as traders worried that an eighth consecutive decline in inventories would cause supplies to remain tight over the next few months, Bloomberg reported.

Among the stocks in the news Tuesday, Starbucks (SBUX) shares rose 8.1% after it appointed its chairman, Howard Schultz, to take on the additional role of CEO, effective immediately, replacing Jim Donald, who is leaving the company. Starbucks also said it will slow U.S. store growth and accelerate international expansion.

Isis Pharmaceuticals Inc. (ISIS) shares jumped 27.4% after it said it signed a deal with Genzyme (GENZ), under which Genzyme will develop and market mipomersen, ISIS's lipid-lowering treatment for high-risk cardiovascular patients.

Leap Wireless International Inc. (LEAP) shares climbed 6.1% on news that it gained about 152,000 net customer additions during the fourth quarter, bringing the total number of net additions for 2007 to about 634,000 and ending the year with about 2.9 million customers.

The Greenbriar Companies Inc. (GBX) shares fell 12.4% after posting a lower-than-expected second-quarter profit of 16 cents, vs. 12 cents per share in the first quarter, on 16% revenue rise.

European stocks finished higher Tuesday. In London, the FTSE 100 index rose 0.33% to 6,356.50. In Paris, the CAC 40 index advanced 0.79% to 5,495.67. Germany's DAX index climbed 0.42% to trade at 7,849.99.

Major Asian markets finished mostly lower. Japan's Nikkei 225 index edged up 0.19% to 14,528.67. In Hong Kong, the Hang Seng index fell 0.24% to 27,112.90. The Shanghai composite index slipped 0.13% to 5,386.53.

Treasury market

Treasury bonds traded higher on the rout in equities. The 2-year Treasury note rose 04/32 to 101-03/32 for a yield of 2.68%, the 10-year note advanced 14/32 to 103-25/32 for a yield of 3.78% and the 30-year bond was up 16/32 to trade at 111-14/32 for a yield of 4.31%.