Another tumultuous week on the markets ended with two days of falling stock prices as investors appeared to be positioning themselves for a recession.
The Dow Jones industrial average fell 172 points Friday, enough to wipe out all the gains notched earlier in the week. The blue-chip index is down 4% for the week and 6.6% for the year.
The index is less than 100 points above the low for the year that it reached last week.
The drop came despite the fact that Friday brought little new information about where the economy is heading. However, the previous few days provided enough bad news about European banks and U.S. manufacturing to push investors into a defensive posture.
"The markets already are pricing in a slowdown," said Peter Kenny, a trader at Knight Capital Group. "Any data we get this next week, the market is telling you it's going to be negative."
Economists at JPMorgan Chase & Co. and Citibank both lowered their predictions for how much the economy would grow at the end of this year. Neither bank is predicting that the U.S. will shrink as it would during a recession.
The Dow Jones industrial average ended the day down 172.93 points, or 1.6%, at 10,817.65. The Standard & Poor's 500 index dropped 17.12 points, or 1.5%, to 1,123.53 points, while the Nasdaq composite index fell 38.59 points, or 1.6%, to 2,341.84.
Investors again sought out the safety of gold and Treasury bonds, which saw their prices rise.
The pessimism dominating the markets Friday made the beginning of the week, when stocks were heading up for the third straight day, seem a distant memory.
The almost daily back-and-forth movements of the markets reflects the uncertainty among experts as to whether the economy is heading back into recession or just slowing down temporarily.
Jim Paulsen, chief investment strategist for Wells Capital Management, said if a recession is coming, stocks still have further to fall. On the other hand, he said, if there is no recession, stocks are probably priced too low.
Traders are waiting on the edge of their seats for an answer to this question, but Paulsen said it would only be revealed slowly through a succession of new data points.
"We are in an unstable place," Paulsen said. "It will take some time before there are enough data reports to get beyond the panic."
The data that came this week were not promising, particularly a report Thursday from the Federal Reserve Bank of Philadelphia, which showed that the economy there was contracting in August. Next Tuesday, investors will be looking for similar information from the Federal Reserve Bank in Richmond, Va.
Much of the uncertainty, though, is being fed by the debt crisis wracking Europe. An increasing number of signals suggest that the problems in some of the continent's weaker economies could create problems for France, Germany and Britain and their banks. These problems could then spill over into the U.S. financial system.
A meeting this week between German President Angela Merkel and French President Nicolas Sarkozy was highly anticipated but did not bring any immediate solutions.
"We will have continued volatility until we have some clarity about what is happening in Europe, and what that means for our banks here," said Victoria Collins, a financial planner at First Foundation Advisors.
One wild card for the coming week is Federal Reserve Chairman Ben S. Bernanke's appearance at the annual Fed conference in Jackson Hole, Wyo. Last year at the conference he announced the so-called QE2 program, which pumped money into the economy through bond buying. Some investors hope that Bernanke will use this year's conference to announce QE3, although there are questions about how effective such a program would be.
"There is a growing chorus of people questioning the Fed and their approach," Kenny said.