Stocks sink as worries mount about spending

NEW YORK -- Stocks plunged Friday, erasing all of the previous day's big gains, as a drop in consumer spending fanned worries that the economic recovery won't be sustainable.

Major stock indexes tumbled more than 2 percent in afternoon trading, including the Dow Jones industrials, which gave back all of Thursday's 200-point gain. The biggest declines were among banks, energy and materials companies.

As stocks fell, investors moved to safer assets like the dollar and Treasurys. At the same time, the Chicago Board Options Exchange's Volatility Index, known as the market's fear gauge, soared nearly 25 percent to 30.88, the highest since early July. Its historical average is 18-20. It hit a record 89.5 a year ago.

The decline in stocks marked an about-face for the market, which had rallied on Thursday after the government reported a 3.5 percent jump in gross domestic product in the third quarter.

Investors started shedding stocks after the Labor Department said personal spending fell 0.5 percent in September. Though the decline was in line with forecasts, it was the largest drop in nine months and followed a 1.3 percent jump in August fueled by the government's popular Cash for Clunkers car rebate program.

The day's report cast further doubt on the economy's recovery, which many economists fear has been driven by the government stimulus measures. Without a rebound in consumer spending, which makes up a major part of the U.S. economy, investors worry the recovery won't last.

With Friday being the last day of the month and the end of the fiscal year for many mutual funds, the market's declines could be exaggerated, analysts said. Fund managers looking to minimize taxes for shareholders often sell some of their investments as the fiscal year comes to a close.

The Dow fell 224.83, or 2.3 percent, to 9,737.75. The Standard & Poor's 500 index fell 26.62, or 2.5 percent, to 1,039.49, and the Nasdaq composite index dropped 48.25, or 2.3 percent, to 2,049.30.

A drop in the mood of consumers added to the day's bad news. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October from 73.5 in September. The reading was revised slightly higher from a preliminary estimate of 69.4 earlier this month, and was roughly in line with expectations.

The Labor Department also reported Friday that personal income, the fuel for future spending, was flat in September compared with the previous month, in line with expectations. A lack of income growth is due, in part, to ongoing high unemployment rates, also a major worry for the market.

"Until we get to better employment numbers, it's hard to get real income growth and real spending ... and we're just not there yet," said Kurt Karl, chief US economist at Swiss Re. "Today is a reaction to a little bit of excess exuberance yesterday."

Financial stocks were among the day's biggest decliners. Shares of CIT Group Inc. dropped nearly 15 percent after the commercial lender said billionaire investor and bondholder Carl Icahn agreed to support its restructuring plan and provide it with a $1 billion line of credit. Investors are still worried that the New York-based company could file for bankruptcy protection. Shares dipped 14 cents to 81 cents.

Bank of America Corp. shares lost 71 cents, or 4.5 percent, to $15.02, while JPMorgan Chase & Co. fell $1.93, or 4.4 percent, to $42.42.

Energy and basic materials producers also fell sharply as the dollar gained ground against other major currencies.

Alcoa Inc. fell 68 cents, or 5.2 percent, to $12.32, while Exxon Mobil Corp. sank $2.54, or 3.4 percent, to $71.42.

On the New York Mercantile Exchange, gold prices slipped about $9 to $1,037 an ounce, while oil prices tumbled $2.38 to $77.49 a barrel.

Bond prices rallied as stocks fell. The yield on the benchmark 10-year Treasury note fell to 3.42 percent from 3.50 percent late Thursday.

Stocks have fallen for most of the past week and are on track to finish the month with losses as worries about the economy escalate. Without stronger evidence that the labor market is improving and consumers are feeling more comfortable about spending, investors will have trouble extending the market's massive rally into a ninth month. Even with this week's declines, the S&P 500 index is up about 55 percent since hitting a 12-year low in early March.

"I think you have a market that is ultimately looking for its direction," said Bob Froehlich, senior managing director at Hartford Financial Services. "We really are at the inflection point. You tend to have an overreaction to both extremes."

Analysts say trading is likely to remain volatile in the coming week amid a flood of major economic news, including the Institute of Supply Management's readings on the manufacturing and services industries, sales reports from major retailers and the Labor Department's October employment report -- arguably the month's most important piece of economic data. The Federal Reserve will also convene for a two-day policy meeting beginning Tuesday.

More than eight stocks fell for every one that rose on the New York Stock Exchange, where volume came to 791.6 million shares, compared with 852.5 million at the same time a day earlier.

In other trading, the Russell 2000 index of smaller companies fell 16.97, or 2.9 percent, to 563.25.

Overseas, Japan's Nikkei stock average rose 1.5 percent. Britain's FTSE 100 fell 1.8 percent, Germany's DAX index dropped 3.1 percent, and France's CAC-40 declined 2.9 percent.