Remember that 936-point gain in the Dow Jones industrial average Monday? It's now mostly gone.
On Wednesday, fear that the U.S. and other nations are sliding into a severe recession trumped investor relief over the banking system bailout, sending the Dow down 733 points. The sell-off came after grim retail-sales data stoked worries that the economy might be contracting, threatening to crush corporate earnings.
The nearly 8% plunge pushed the Dow back below the 9,000 level, leaving only a 126-point gain in the index for the week. It also damped hopes that the government's plan to inject capital directly into the faltering banking system would brake the brutal stock selling on Wall Street, where the Dow suffered its worst week ever last week.
"The stock market had already priced in a recession, but now we're seeing fears of a deep, long-lasting recession or even a depression," said Gary Wedbush, head of capital markets at Wedbush Morgan Securities in Los Angeles.
There are already signs that the slumping economy is taking a bite out of corporate earnings. That could foretell further declines in the stock market, which is hypersensitive to corporate profit reports.
"We're seeing an across-the-board collapse in earnings expectations," said Dirk van Dijk, director of research at Zacks Investment Research in Chicago.
In the last four weeks, he noted, analysts covering companies in the Standard & Poor's 500 index have issued more than five downward earnings revisions for 2008 or 2009 for every upward revision. Analysts, who as of last Thursday had expected this year's overall profits to slide 2.7% from 2007, now predict a 4.1% drop.
"It's clear that we're in for a good old-fashioned, long-lasting, nasty recession that's going to put a lot of people out of work and inflict a lot of pain," Van Dijk said. "This is going to be like the mid-1970s or the early '80s -- not like the early '90s or 2000-2002."
Stocks began to slide after the government reported early in the day that retail sales slumped 1.2% in September -- far worse than the 0.7% decline that economists had expected.
The downswing accelerated as the session wore on despite Federal Reserve Chairman Ben S. Bernanke's hints during a 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 massive financial rescue plan launched by governments around the world, a "broader economic recovery will not happen right away."
