Continued problems in the credit-card industry that spilled over into the broader markets renewed fears of a recession and sent stocks closing sharply lower Friday, despite hopes for an interest rate cut.
Major indexes were at or near their daily lows as investors dumped shares not only of credit card companies but also consumer-sensitive stocks. Neither a deal that rescues troubled mortgage lender Countrywide Financial nor a cash infusion for Citigroup was able to cheer Wall Street, though beleaguered financial stocks did post mostly higher numbers.
The Dow Jones industrial average ended down 246.79 points, or 1.92 percent, at 12,606.30. The Standard & Poor's 500 Index fell 19.31 points, or 1.36 percent, to 1,401.02. The Nasdaq Composite Index dropped 48.58 points, or 1.95 percent, at 2,439.94.
The S&P 500's year-to-date decline of 4.59 percent makes it the fourth-worst start to any year in the history of the benchmark, according to Howard Silverblatt, senior index analyst at Standard & Poor's in New York.
For the week, the Dow shed 1.5 percent, the S&P lost 0.8 percent and the Nasdaq declined 2.6 percent.
While economists have not declared a recession for the US economy, there was a strong mindset that one had already begun at least in terms of market sentiment.
"We're at the point where if we don't get a technical recession, we're getting so close that it feels like one," said Mike Larson, an analyst at MoneyandMarkets.com. "At least in the first part of 2008, the economy is very weak. Economically sensitive parts of the market aren't going to do well in that environment."
American Express warned that a slowdown in cardholder spending and rising delinquencies would lead to a pre-tax charge of around $440 million for the fourth quarter.Its shares were the biggest drag on the Dow and S&P.
The company's woes infected the broader markets, with losses posted at consumer-oriented companies Procter & Gamble and Kimberly Clark .
McDonald's also weighed on the Dow after a Friedman Billings Ramsey analyst began coverage of the company by saying its stock was fairly priced and sales growth in stores open at least a year would level off.
Retail earnings also reflected the economic slowdown, with Tiffany joining the chorus of outlets performing poorly during the December holiday shopping season. The company saw its shares tumble after it reported lower fourth-quarter salesand cut its outlook.
Tech stocks also had a bad day.
Among the companies performing poorly on the Nasdaq: Networking equipment maker Juniper Networks , which suffered two analyst downgrades; and telecom RF Micro Devices, which tumbled after it warned of lowered profits.
But some saw a flurry of activity in the banking industry, coupled with Fed Chairman Ben Bernanke's strong indications Thursday that an aggressive interest rate was on the way, indicative of a lack of confidence in a market that needed so much stimulus to stay alive.
"On one hand it is moderately bullish that these companies can find some money out there for capital," Larson said. "On the other hand, what does it say about the state of the economy? The reason the Fed is cutting so aggressively is because the economy is weak and probably getting weaker."
Banks Mostly Higher
Bank of America confirmed this morning it will buy Countrywide for $4 billion. Countrywide shareholders will get 0.1822 of a Bank of America share for each of their shares.
The Countrywide transaction is expected to close in the third quarter. There was intense debate over the wisdom of the deal.
"Bank of America investors are being dragged into the ground zero of the mortgage meltdown before all the bombs have exploded," said Martin Weiss, director of research for Weiss Research Group.
Merrill Lynch is expected to see $15 billion in writedowns from subprime exposure, almost twice what the company originally estimated. Merrill shares moved to the upside, however, as investors have tended to reward companies that are forthright about their subprime exposure.
Citigroup shares gained on speculation that the bank could see a large cash infusion soon and some staff will be cut. MBIA also rose after it said that a $1 billion debt sale could yield a 14 percent gain.
CNBC also has learned that JP Morgan and Washington Mutual have had "very preliminary" talks about a merger. Though neither company would confirm, the chatter pushed WaMu's shares to a 5 percent gain.
Swiss bank UBS said in a letter to investors itcannot predict the final impact of the subprime crisis, but that a new capital injection would strengthen its position as it called on shareholders to support an emergency capital hike.