Stocks Plunge as Economic Worries Grow

Jittery investors dumped shares Tuesday, driving the S&P 500 down over 5% in the first five days of the trading year

The wintry gloom that has enshrouded Wall Street thickened on Tuesday as major indexes slumped once again. Repeated attempts by equities to rally unraveled amid mounting jitters about an economic slowdown. While further weakness in the financial sector eroded early gains but it was consumer pullback fears in the telecom industry that added fuel to the sell-off in major stock indexes.

On Tuesday, the Dow Jones industrial average finished 238.42 points, or 1.86%, lower at 12,589.07. The broader S&P 500 index was down 25.99 points, or 1.84%, at 1,390.19. The tech-heavy Nasdaq composite index dropped 58.95 points, or 2.36%, to trade at 2,440.51.

On the New York Stock Exchange, 21 stocks traded lower for every 11 that gained ground, while on the Nasdaq, the ratio was 21-9 negative.

The 5.32% drop in the S&P 500 index in the first five trading days of this year is the biggest decline since 1950, beating the 4.7% drop seen in the first five trading days of 1978.

Countrywide Financial (CFC) helped set off the weakness in financials, plunging more than 30% at one point to its lowest levels since the 1987 stock market crash on rumors that it's close to filing for bankruptcy protection. The company denied the rumors.

Morgan Stanley cut its profit estimates for Ambac Financial Group (ABK) and MBIA Inc. (MBI) on Tuesday, saying that the deteriorating credit markets are continuing to hurt the bond insurers' earnings and revenue. That sparked selling in both stocks.

The market sell-off gained momentum in the final half-hour of trading, led by AT&T (T) and other telecom names on renewed worries over softness in consumer spending. Stoking those concerns were comments by AT&T's chairman and chief executive, Randall Stephenson, about weakness in its consumer business segments driven by service disconnections due to nonpayment of its access lines and home broadband services.

The inability for the stock market to record two consecutive days of gains so far this year indicates that the path of least resistance is toward the downside, and it's hard to fight that psychology among investors, said Art Hogan, chief market analyst at Jefferies & Co. in Boston.

Among the reasons for that pessimism on Tuesday were comments by Treasury Secretary Henry Paulson, who wasn't as upbeat about the housing market as he's been in the past, and simultaneous fears about rising inflation and a slowdwon in the economy, Hogan said. A U.S. Presidential election that's wide open, where the market implications of a victory by either of the current front-runners are unknown, is also troubling, he added.

"To get two up days in a row, we need to see a day where there is no other-shoe-to-drop rumor, no Countrywide news, no negative economic data or no earnings writedown," he said. "The problem is that as we get into earnings season, it’s difficult to find that day."

Elsewhere in the financial sector, James Cayne is expected to resign as CEO of Bear Stearns, according to a Wall Street Journal report, bowing to mounting pressure from Joe Lewis, who owns a 9% stake in the brokerage firm and has lost about $200 million on his investment due to the firm's exposure to subprime mortgage-backed securities. Cayne will reportedly remain in his post as chairman of the company.

Leading this week's trickle of new economic data were U.S. pending home sales, which fell 2.6% to 87.6 in November, from an upwardly revised 89.9 in October. Sales were down in three of the four regions, led by a 13% drop in the Northeast. While the reading was slightly better than expected, sales were down 18.5% from a year ago, and suggests existing home sales will see further declines this year, Action Economics said.

The consumer credit surged $15.4 billion in November, nearly double the average forecast of $7.8 billion by economists., while the October figure was revised lower to a gain of $2.0 billion from the prior $4.