Stocks closed sharply lower as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing economy.
The market selloff, which began with the opening bell, picked up speed in the final hour as the Dow Jones Industrial Average closed down about 362 points, or 2.6%.
The S&P 500 skidded 2.64%, its biggest drop since Aug. 9, while the Nasdaq tumbled 2.25%.
The Fed, which cut interest rates Wednesday a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.
Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.
"Feeling the Pain"
"Wall Street is in love with the idea of a rate cut, and realized that the Fed said inflation is still a concern--that lowered the chances of a cut in December," said Ryan Detrick, a senior technical strategist with Schaeffer's Investment Research. "We're now feeling the pain now that investors have slept on it, and figured out what they said."
Christopher Cordaro, chief investment officer at RegentAtlantic Capital, said Wall Street remains anxious about the possibility of recession. He also believes the market is devoid of enough positive news "to have any type of sustained rally."
Investors were unswayed when the Fed pumped $41 billion into the U.S. financial system, one of its largest cash infusions since the credit crisis began in the summer. This increases the amount of money banks have to lend, and helps improve liquidity. In the past, such an action helped soothe the market, but that was not the case Thursday.
With the market growing pessimistic about the economy, the Labor Department's report on October jobs creation, scheduled to be released Friday morning, will be taking on even more importance than it usually has. The data is expected to show unemployment remained steady in October, with payroll growth of 85,000 new jobs, compared with 110,000 in September.
Analyst downgrades for Citigroup and Bank of America led Thursday's huge drop that infected nearly every sector, while disappointing earnings from ExxonMobil and Sprint compounded Wall Street's problems. Credit Suisse also reported that its third-quarter earnings were wiped out by subprime writedowns.
With two camps battling over whether the recent spate of subprime writedowns indicated the worst was over or yet to come, investors largely took the pessimistic view. Citi shares hit their lowest point in five years while Sprint and Bank of America both reached 12-month lows.
Many were simply still waiting to see what other banks affected by the credit crunch would disclose after giants like Merrill Lynch and Countrywide Financial recently disclosed massive writedowns from subprime losses.
"Not everyone has been as bold as Merrill Lynch," said Chris Orndorf, managing principal and head of equity at Los Angeles-based money manager Payden & Rygel. "I don't think other commercial banks and investment banks have been equally willing to face reality. Until you get to that point financials are going to lag.
"People don't have confidence in the numbers they're seeing, and when they don't have confidence they don't invest."
The onslaught of selling triggered trading curbs early in the day.
The curbs, instituted at 9:38 a.m. after the NYSE Composite Index had tumbled 212 points, or 2 percent, at 10,099, require that all program selling of S&P 500 stocks must be on an up-tick.
The market hangover came a day after the Federal Reserve, moving to head off the threat of a recession, cut two key interest rates by a quarter point Wednesday, but signaled that it may be done easing rates for now as inflation risks were mounting.
That will set up a fourth quarter where investors are dependent solely on economic data and earnings, with dimming hopes that Fed will save a struggling market with another rate cut.
"Now we’re going to have to start looking at economic data and actually reacting to bad news as bad news, as opposed to bad news is good because the Fed is going to cut rates," said Arthur Hogan, managing director at Jefferies.
Economic Indicators Fail to Excite
Economic reports released before the bell showed inflation staying tame and drops in jobless claims and planned layoffs, but consumer spending slowing as the critical holiday season approaches
Also, growth at factories deteriorated to its slowest pace since March as tighter credit conditions and a housing downturn proved a drag on production, according to the Institute for Supply Management. The report pushed Treasuries to further gains.
Some held out hope that Thursday's carnage would be brief and was in fact normal considering the market's better-than-expected reaction to the Fed decision.
"The market giveth and the market taketh away. This is a healthy correction here," said Stephen Porpora, a floor broker at William O'Neill. "The market's been on a tear lately. The market liked the rate cut, was happy with it at the end of the day.
"Today we got barraged with Citigroup news ... and we're pulling back. It's a great chance to take some profits."
In fact, some even see the bank troubles and the corresponding downturn in share prices as a strong buying opportunity.
"This market heads higher into the end of the year. We're going through a tough period that's a buying opportunity that's evolving as we speak," said David Kotok of Cumberland Advisors, who believes the Fed is not done cutting rates. "The banks are giving us now the results of toxic paper being written off. This is the quarter in which everything becomes transparent. "
But the troubles spread beyond the financial sector.
Energy producers continued to take a beating as oil once again touched a record before profit-taking pushed down the price of light, sweet crude and London Brent.
Dow component Exxon Mobil reporting its third-quarter earnings declined 10 percent as profits from the production of gasoline slipped. Exxon led a strong downward trend in the oil market that also brought down Chevron , ConocoPhillips and BP .
Sprint also posted a lower profit as it lost subscribers in the third quarter and warned of continued weakness in fourth-quarter customer numbers.
On the Nasdaq, one of the biggest losers was Crocs , maker of the ubiquitous rubber sandals, which slid more than 26 percent after revised guidance failed to meet investor expectations.
The Volatility Index , after backing up during Wednesday's gains, returned above 20, the benchmark for a volatile market.