US stocks fall sharply on recession fears

Wall Street stocks fell sharply on Friday after weak employment data raised fears that the US economy could tip into recession, capping a torrid start to 2008 for US equities.

Traders expecting a New Year bounce were sorely disappointed and instead investors this week geared up for an economic downturn by selling stocks exposed to the US consumer.

A spike in commodity prices encouraged traders to seek refuge in energy and some mining stocks but industrial and transport companies were punished amid the threat of higher costs. Technology firms, financials and homebuilders were also pummelled as confidence in the outlook for the US economy subsided.

The S&P 500 fell 2.5 per cent to 1,411.63 on Friday, marking a decline of 3.9 per cent for the first three days of the trading year.

The Dow Jones Industrial Average fell 3.5 per cent to 12,800.18 for the first three trading days of January. US blue-chips on Wednesday posted their worst start to the year since 1983.

The Nasdaq Composite fared particularly poorly, sliding 3.8 per cent to 2,504.65 on Friday and down 5.6 per cent since the New Year. Hardware companies were sold amid concerns about corporate tech spending and chipmakers fell following brokerage downgrades.

The Nasdaq has fallen more than 10 per cent from its October high, a "market correction" in trader parlance. Small-cap stocks also had a poor run with the Russell 2000 falling 5.8 per cent since the New Year to hit a 15-month low.

Stocks ended the the week on a sour note after unemployment jumped to 5 per cent, its highest since November 2005. Meanwhile non-farm payrolls rose much less than expected.

Traders were wary of a weak jobs number as many analysts consider falling employment a leading indicator of an economic downturn.

"If you start to have an uptick in unemployment it can cause a domino effect and the Fed has to deal with that aggressively," Doug Roberts, chief investment strategist at Channel Capital Research, said.

However, the prospect of more rate cuts failed to stem the sell-off as fears of a recession caused stocks sensitive to the US consumer to plunge.

Consumer discretionary stocks, which include leading US retailers, hoteliers, homebuilders and restaurant chains, have suffered a miserable start to 2008.

The sector officially entered a "bear market" this week having fallen more than 20 per cent below its previous market peak. Leading the rout were retailers including Macy's and JC Penney, the department store operators, which fell 13.4 per cent to $22.40 and 14 per cent to $37.64 respectively. Fastfood chains were hit after Wendy's, the burger chain said December same-store sales declined. Its shares have fallen 9.7 per cent to $23.34 in 2008.

Transport stocks, another bellwether of economic sentiment, were sold as crude oil prices surged, threatening to hamper profitability.

YRC Worldwide, a trucking company, fell 26.2 per cent to $12.62 over the period after Fitch Ratings cut its debt to junk. Goodyear Tire & Rubber, a company reliant on the transport sector, fell 12.9 per cent to $24.58.

Industrials came under pressure after an index of December manufacturing activity contracted unexpectedly this week. Caterpillar (NYSE:CAT), the heavy equipment maker, has fallen 5.6 per cent to $68.53 since the New Year.

Ford (NYSE:F) hit a 22-year low, falling 8.9 per cent to $6.13, after Toyota overtook the vehicle manufacturer to claim the number two spot in the US market amid some disappointing December sales from US carmakers.

Technology stocks were another disappointment with chipmakers particularly weak. Intel (NASDAQ:INTC) fell 15 per cent to $22.67 over the period after JPMorgan downgraded the stock on concerns about slowing orders. Investors seeking respite from the downward trend looked to large-cap multinationals with a high proportion of international sales. Coca-Cola has risen 0.8 per cent to $61.85 since the new year.

Traders also bought shares in the agribusiness sector.Monsanto (NYSE:MON) has put on 7.1 per cent to $119.63 for 2008 after it almost trebled first quarter net income and raised its full-year earnings guidance.

Energy companies also outperformed as oil prices boosted earnings expectations. Superior Energy Services (NYSE:SPN) won a $750 contract to decommission rigs in the Gulf of Mexico and it rose 24.8 per cent to $42.95.

Record gold prices helped mining stocks. Newmont Mining (NYSE:NEM) rose 7.4 per cent to $52.42, while Yamana Gold (AMEX:AUY) added 14.4 per cent to $14.80.