Recession confirmation sends stocks plummeting 679

NEW YORK - A litany of bad economic news snuffed out Wall Street's five-day rally Monday, sending stocks falling sharply as investors realized anew how troubled the U.S. economy really is.

Confirmation that the nation is in a recession followed reports of only a modest gain in holiday shopping sales, prompting investors to begin unloading stocks. Downbeat data on manufacturing and construction spending added to the market's gloom.

The Dow Jones industrial average fell 679 points, wiping out more than half the 1,276 points it added during a five-day rally built on investors' budding optimism about the economy. The major indexes all lost more than 7 percent, with the Standard & Poor's 500, the measure most closely watched by market professionals, falling nearly 9 percent.

The market began the day sliding on initial reports that the holiday shopping season, while better than some retailers and analysts feared, was mixed, a sign that Americans are very reluctant to spend. That has Wall Street concerned about the impact of a continuing drop in consumer spending on the sagging economy.

According to preliminary figures released by RCT ShopperTrak, a research firm that tracks total retail sales at more than 50,000 outlets, sales rose only modestly over the Thanksgiving weekend. Investors are concerned that this is the start of a disastrous holiday shopping season.

Meanwhile, downbeat economic reports on the manufacturing sector and construction spending only added to investors' concerns.

The day's news reminded investors, who last week were buying on a burst of optimism, that the economy is still in serious trouble. And at midday, Wall Street had confirmation of what everyone has suspected for months, that the nation is indeed in a recession. The National Bureau of Economic Research, considered the arbiter of when the economy is in recession or expanding, said the U.S. recession had begun a year ago, in December 2007.

That assessment made the retail sales figures all the more unnerving.

"Unfortunately, two-thirds of the American economy is based on the spending of the American consumer," said Mike Stanfield, chief executive of VSR Financial Services. "When the consumer pulls back, it's very hard for the economy to gain much traction."

Investors had been hopeful that last week's rally - when the major indexes shot up by double digit percentages - was a sign that some stability had returned to a market badly shaken by months of discouraging economic data. But analysts expect economic concerns to weigh on the market for some time to come.

"Everyone knows the recession is on us, the question is now will it be short and shallow or long and severe," Stanfield said.

Chuck Widger, chief executive of investment management firm Brinker Capital, expects the volatility to continue until investors have better visibility on the future.

"Investors are looking for better data on the economy," he said. "We've got baked in pretty nasty assumptions for the economy this quarter. The markets are looking ahead to the first quarter for data that will confirm or deny the bad news."

Only 212 stocks were in positive territory on the New York Stock Exchange with 2,679 declining. Volume came to 838.9 million shares.

Treasury Secretary Henry Paulson said during a speech that the administration is looking for more ways to tap a $700 billion financial rescue program and will consult with Congress and the incoming Obama administration. The program has distributed $150 billion out of the $250 billion earmarked to buy stock in banks as a way to boost their resources so they can lend more.

He says the administration is looking at other ways to utilize the rescue package, including alternatives for providing capital to financial institutions.

Meanwhile, Federal Reserve Chairman Ben Bernanke said in another speech Monday that further interest rate cuts are "certainly feasible," but warned there are limits to how much such action would revive the economy. The central bank's key interest rate now stands at 1 percent, a level seen only once before in the last half-century.