Stocks fall on torrent of bad news

Dejected investors sent stocks plunging Thursday, hurtling the Dow Jones industrials down more than 340 points after retailers and the government added to a mountain of bad economic news and devastated hopes for a late-year recovery.

The market was already nervous as it waited for the government to release its August employment report on Friday. So news from the nation's major retailers that shoppers curtailed their spending last month due to higher gas and food prices came as a heavy blow. Consumers focused on basics at discounters and waited for deals – a bad sign for the holiday season as families may be just as cautious with their gift-giving.

Even lower gas prices may not offer relief in the months ahead, as shoppers are still seeing personal incomes fall and food prices remain high.

Wal-Mart Stores Inc., the world's largest retailer, as well as warehouse club operators such as Costco Wholesale Corp. remain among the few bright spots. But many teen retailers and luxury chains did poorly, a sign that consumers are spending mostly on essentials and putting discretionary buying on hold.

Meanwhile, the Labor Department said new applications for unemployment insurance rose by 15,000 last week from the previous week. That missed expectations for a fourth-straight week of declines, heightening worries that the average American will have even less to spend.

Furthermore, if the job market keeps deteriorating, it is tough for Wall Street to see a rebound in sight for the tumbling housing market.

“You have to have a paycheck to pay that mortgage,” said Craig Peckham, market strategist at Jefferies & Co.

The numbers released Thursday were a sign that despite some upbeat reports over the past month, the economy remains deeply troubled. Investors are not expecting any promising news in the August jobs report, particularly after the ADP National Employment Report said that private sector employment decreased in August by 33,000. Economists are predicting the government will report the eighth straight monthly payrolls drop, and a rise in the unemployment rate.

The market was so disheartened that it showed little reaction when the Institute for Supply Management said the service sector grew unexpectedly in August for the first time in three months as new orders increased and inflation moderated. The August reading of 50.6 was higher than the 50.0 expected, and the reading of 49.2 in July; but the sector's edging above the threshold between contraction and expansion was hardly a sign of a robust economy.

An economic recovery appears to be far off to investors – and with the Dow down more than 15 percent for the year so far, they don't appear to be holding out for a significant upturn in stocks either.

The Dow fell 344.65, or 2.99 percent, to 11,188.23. It was the worst drop for the blue-chip index since June 26, when it fell more than 358 points, or 3.03 percent.

Broader indexes also tumbled. The Standard & Poor's 500 index fell 38.15, or 2.99 percent, to 1,236.83, and the Nasdaq composite index dropped 74.69, or 3.20 percent, to 2,259.04.

All three indexes moved back into bear market territory, defined as a 20 percent drop from a recent peak. The indexes last October were at highs, including a record 14,198.09 for the Dow.

The financial sector fared poorly Thursday as well, particular after bond fund manager Bill Gross wrote in a commentary on his firm's Web site that the U.S. Treasury needs to provide funding to mortgage financiers Fannie Mae and Freddie Mac.

The biggest decliners among the 30 Dow components were three financial stocks: Charlotte-based Bank of America Corp., which fell $2.36, or 7.2 percent, to $30.60; Citigroup Inc., which fell $1.31, or 6.7 percent, to $28.30; and American International Group Inc., which fell $1.36, or 6 percent, to $21.22.