Wall Street took its worst beating in four years, as a selloff in the Chinese stock market triggered a global stock selling spree and raised fears of a slowdown in the world economy.
"Asia sneezed and we all picked up a global chill," Frederic Dickson, Chief Market Strategist at D.A. Davidson, told CNBC.com. "We're not going to go off of the ledge but tighten up the seatbelts a notch or two because it could be a little bumpy in the next few days. There's still a tremendous cushion of cash out there with most investors waiting for a pullback to put some money to work. We'll see if they come in."
The Dow's 416-point drop was its worst point decline since Sept. 17, 2001, the first trading day after the Sep. 11 disaster. On that day, the Dow dropped 684 points.
Tuesday's 3.29% drop was the worst percent decline since March 24, 2003. The S&P 500 lost 3.5%, its worst loss since the day. The Nasdaq fell 3.86%, its biggest one day percent decline since Dec. 9, 2002 when it fell 3.89%.
"This is a hiccup, well, maybe a slightly louder than normal burp," David Sowerby, Chief Market Analyst at Loomis Sayles, told CNBC.com. "I would deem it a modified correction at 5% and an outright correction at 8%. At this point, I think we're on our way to a modified correction."
After trading at sharply lower levels all day, the Dow in midafternoon took a surprise more than 150 point tumble, in just one minute. Its steepest loss was a stunning 545 point decline.
Dow Jones, which calculates the Dow Jones Industrial average, said the steep decline in the Dow was real but that it experienced a delay calculating the average due to heavy trading volume.
Dow Jones said the average lagged behind the market's actual decline and when it switched to a backup system there was rapid catch up. Traders said they believe this coincided with some big derivatives trades.
The NYSE separately said it had its own technical problem, which caused an interruption in trading. It described the technical problem as intermittant and said it was assessing the cause. The NYSE would not elaborate.
"We've been in a market that was essentially fueled by home-equity loans and credit card advances and it's been widely speculative and a bubble brewing now for at least six months," Jack Albin, Chief Investment Officer at Harris Private Bank told CNBC.
The S&P 500 had its first five-session losing streak in three years.
"In the first seven weeks of the year, the Dow rose more than 2.5%, but in the last seven days that gain has been wiped out," Kevin Caron, Market Analyst at Ryan Beck, told CNBC.com. "That's a pretty sharp correction by definition. There is potential for more downside near-term, but I still think the S&P ends higher, around 1510, by the end of the year."
China's Shanghai Composite fell nearly 9%, its biggest drop in a decade, amid a mulititude of rumors including that authorities would crack down on speculation. The selling spread to the European markets and continued in the U.S.
"We've got a massive sell off in China, ongoing geopolitical concerns, concerns about subprime mortgages and economic growth," Arthur Hogan, Managing Director at Jefferies, told CNBC.com. "Put it all together, you've got (a market) that has been waiting for a selloff. You never know when you're going to get that catalyst. Looks like we got it today."
All Sectors Hit
Selling was across the board in all of the S&P 500 sectors, with materials leading the decline, off by more than 4%. Decliners outpaced advancing shares by ten to one.
In economic news, existing-home sales rose 3% in January, the largest percentage gain in two years. The Conference Board said consumer confidence rose to a 5-1/2 year high in February, beating forecasts, which were for a decline. However, durable goods orders fell by 7.8% in January, much more than expected.
Treasury prices rallied on the data, sending yields lower.
The yield curve, which has inverted rapidly over the last few days, was at 42% recession odds.
"I think the stock market is going to be the forebearer of when we get that recession," Steve Hochberg, Chief Market Strategist at Elliott Wave International, told CNBC. "Usually recessions follow downturns in the market, so we're probably not going to get one right away, but once the market turns to a downward trend, I think the economy will eventually follow."
Shares of Apple were off after the company said it will delay its Apple TV device until mid-March.
Federated Department Stores, parent of Macy's and Bloomingdale's, said stronger sales at established stores and lower costs resulted in a 5% rise in fourth-quarter earnings. Stripping out costs related to its acquisition of May Department Stores, the retailer reported earnings of $1.66 per share. Analysts were expecting earnings of $1.58 per share.
Shares of Nordstrom fell after the department store chain posted fourth-quarter earnings that trailed analysts' average forecast by a penny.
Freddie Mac , announced tougher standards saying it will only buy subprime mortgages where the borrower has been qualified at the higher rates to which the loans adjust.
"I think because of a variety of changes in circumstances, in housing prices and in interest rates, some of these products that worked in the past don't work going forward," said Richard Syron, CEO of Freddie Mac, in an interview on CNBC.
The new standards won't take effect until September to avoid squeezing out borrowers who are in the midst of transactions now.
New York light crude futures traded above $61 a barrel ahead of inventory data due out on Wednesday.
Europe, Asia Close Lower
It was the biggest drop in more than a decade for the Shanghai Composite Index, which tumbled 8.8% before closing. That's the biggest single-day decline since February 1997, just after the death of Communist Party elder Deng Xiaoping.
European shares followed the negative sentiment at the open and continued to trade down the entire session with high volumes in what some investors were seeing as a much needed consolidation. Corporate earnings and data releases were still in focus apart from the sell-off.
The FTSE CNBC Global 300 reflected the fall.
In Spain oil major Repsol reported full-year adjusted net profit down by 12.3% to $4.1 billion, the company’s shares traded down.
Air Liquide lost early gains to trade down by around one percent despite the company setting out new mid-term earnings guidance, reporting higher-than-expected 11.4% growth in its 2006 net profit and announcing a share split and dividend hike. The CAC-40 closed sharply lower.
Mining stocks were aggressively sold off in British trade with BHP Billiton, Rio Tinto and Anglo America all trading down significantly. The FTSE 100 fell in sync with the other indexes.
Germany’s DaimlerChrysler is in the spotlight again as the company’s labor representatives said they would oppose a deal that would give it a stake in General Motors in exchange for giving Chrysler to the U.S. automaker, the Wall Street Journal reported on Monday, citing people familiar with the matter. DaimlerChrysler was trading down, while the DAX closed lower as well.