Stocks turned lower as a drop in mid-Atlantic manufacturing in October brought the crushing reality of recession back to the front burner.
The market initially opened higher on reports that consumer prices were flatin September, while weekly jobless claims fell for the latest week. But stocks quickly reversed after a 10 am report that the Philadelphia Fed's index of mid-Atlantic factory activity fell much more than expected and as industrial output hit a nearly 34-year low.
"Looking at inflation right now is like looking in the rearview mirror while ignoring the train wreck dead ahead," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. ""Even Fed policy makers are saying the economy appears to be in a recession, and that is why the stock market has fallen more than 40% from the highs last year, it is discounting a recession if not outright depression."
The Dow Jones Industrial Average retested last Friday's low, breaking through to a new five-and-a-half year low before clawing its way back. In the prior session, worries about recession sparked a massive selloff that sent the blue-chip index down more than 700 points.
The CBOE volatility index, widely considered the best gauge of fear in the market, soared to a new record above 80.
The price of a barrel of oil dropped to about $70after a report showed crude inventories rose by 5.6 million barrels, more than double the 2.2-million-increase expected.
Dow component Citigroup was the biggest decliner on the Dow after the bank posted its fourth straight quarterly loss amid credit costs and writedowns totaling $13 billion. Citigroup said it's making good progress on shedding assets and cutting costs but warned that tight credit conditions and the potential global recession could cut into other businesses.
Merrill Lynch shares also declined after the bank reported its fifth striaght quarterly loss and missed analysts' target amid writedowns of $9 billion, most of which occurred in September.
Bank of New York Mellon reported its profit was cut in halffrom a year earlier but still managed to beat expectations.
In the tech sector, the world's largest handset maker Nokiamissed market profit expectations as a global slowdown in consumer spending and increased competition hit the bottom line.
Elsewhere, fears of recession battered financial markets even as governments sought yet more action to pull the world economy from the doldrums. Japan's Prime Minister, Taro Aso, said Washington may need to push yet more cash into banks to restore investor confidence.
European Union leaders, meeting in Brussels, were to call for action to combat economic decline, including support for industry, according to media reports, while the two major Swiss banks needed emergency funding to weather the crisis.
Speculation is growing that the Fed will be forced to cut rates again as more data emerges that consumers are suffering because of the financial crisis.
Consumers plan to spend an average of $832.36 on holiday shopping this year, up just 1.9 percent from a year earlier the National Retail Federation's 2008 holiday survey showed. That would be the smallest rise since 2002, when the NRF began conducting the survey.
Hedge funds had their worst month ever in September, as all major categories of funds chalked up losses over the month, CNBC has learned. Emerging markets, long equity funds and distressed strategies had the worst results.
The declines came as investors withdrew $43 billion from hedge funds—almost seven times the previous monthly record for redemptions, according to TrimTabs Investment Research data.
Diversified manufacturer United Tech reported a 6 percent rise in profit, boosted by continued strong demand for helicopters and products used in commercial construction.
And the Securities and Exchange Commission extended a temporary short sale disclosure rule until Aug.1, 2009, to give it time to solicit public comment and fine tune details such as whether to publicly reveal the short positions.
Still to Come:
THURSDAY: Industrial production; Philly Fed survey; weekly natural-gas inventories; Earnings from Capital One, Google and IBM
FRIDAY: Housing starts; consumer sentiment; Earnings from Gannett, Honeywell and Sony Ericsson
Send comments to email@example.com.