Stocks plummet on retail sales, jobless claims

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By David M. Dickson

Sluggish retail sales, an unexpected jump in jobless claims and a warning of a "financial tsunami" sent stocks plunging 3 percent Thursday as fears of an economic slowdown intensified.

The Dow Jones Industrial Average dropped 344.65 points to 11,188.23 on Thursday, and the Standard & Poor's 500 Index shed 38.15 points, its biggest loss since June 6. The Nasdaq Composite Index dropped 74.69 to 2,259.04.

All three indexes moved back into bear market territory, defined as a 20 percent drop from a recent peak.

Many retailers reported disappointing back-to-school sales in August, 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 - heightening worries that average Americans will have even less money to spend as the crucial holiday shopping period approaches.

But it was energy stocks that led the market lower as a barrel of light, sweet crude oil declined another $1.46 to settle at $107.89 on the New York Mercantile Exchange. Oil prices have slid 27 percent from their July 11 peak of $147.27 per barrel. While the retreat in oil prices is welcome news for consumers, investors worry that the price dip signals a global economic slowdown and outright recession in many countries, including the United States, as demand for fuel keeps falling.

Shares of banks and brokerages also plunged after Bill Gross, co-chief investment officer of Pacific Investment Management Co., the world's largest bond fund, warned of a "financial tsunami" in a commentary he posted on the firm's Web site.

Mr. Gross urged the U.S. Treasury to provide funding to mortgage financiers Fannie Mae and Freddie Mac to keep the nation's credit crisis from worsening. The two government-sponsored enterprises hold or guarantee more than $5 trillion in mortgages.

"If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury," he said.

Freddie shares fell 30 cents, or 5.6 percent, to $5.08, and Fannie shares fell 65 cents, or 8.9 percent, to $6.67.

The biggest decliners among the 30 Dow components were financial stocks: 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.

Since the credit crisis erupted in August 2007, commercial and investment banks around the world have written off more than $500 billion in mortgage-related losses. In July, Treasury Secretary Henry M. Paulson Jr. unveiled a plan that would permit the Treasury to use taxpayer funds to finance loans or equity investments in Fannie Mae and Freddie Mac.

The day after the Federal Reserve issued a report declaring that "economic activity has been slow" in most of the Fed's 12 regions, two Federal Reserve bank presidents warned Thursday that the U.S. economic situation could deteriorate further.

The "severe economywide credit crunch" afflicting the United States means that "things could get worse before they get better," said Federal Reserve Bank of San Francisco President Janet Yellen, who warned of "substantial downside risks - especially emanating from the financial system."

"I think it is very likely we will suffer anemic growth for the current and perhaps the next couple of quarters," said Richard Fisher, president of the Federal Reserve Bank of Dallas.

This article is based in part on wire service reports.