Stocks tumble on weak service-sector report
NEW YORK » Wall Street plunged yesterday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year.
The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003. The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.
"The report drives a nail into the coffin from investors' minds that we're in a recession," said Todd Salamone, director of trading at Schaeffer's Investment Research. "That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell."
The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. Economists had expected another month of growth.
It's possible the service sector, which includes businesses ranging from restaurants to retailers to banks, could bounce back in February as the manufacturing sector did in January after its December contraction. The benefit of the Federal Reserve's two big interest rate cuts in the latter part of January could also help spur the service sector back into growth mode later this year.
Still, the data was particularly worrisome given last week's Labor Department report, which showed that the U.S. economy lost jobs in January for the first time in more than four years.
Fitch Ratings' plans to lower the rating on more than $100 billion wrapped up in bond funds called collateralized debt obligations added to the host of concerns plaguing Wall Street. That could cause more problems for struggling banks, brokerages, and bond insurers.
The Dow fell 370.03, or 2.93 percent, to 12,265.13, after falling 108 points on Monday. Yesterday's slide was the blue chip index's largest one-day percentage drop since it lost 3.3 percent on Feb. 27, 2007, and its largest point drop since it fell 387 points last Aug. 9.
The broader Standard & Poor's 500 index lost 44.18, or 3.20 percent, closing at 1,336.64, while the Nasdaq composite index lost 73.28, or 3.08 percent, to 2,309.57. The Russell 2000 index of smaller companies fell 21.88, or 3.02 percent, to 701.58.
In Monday and yesterday's trading, the Dow gave up most of the gains it made last week, when it jumped 536 points, or 4.39 percent.
However, according to JPMorgan equities analyst Thomas J. Lee, the three worst readings on record in the ISM's service sector index are associated with stocks rising in the ensuing three months -- on average, by 6 percent.
Light, sweet crude oil declined $1.61 to $88.41 a barrel on the New York Mercantile Exchange, as traders bet that a slower economy would dampen energy demand. An extended drop in energy prices could aid businesses that are finding their supply costs are rising, but that their customers are having trouble taking on price increases.