Stocks Plunge, Dow Drops 733

Reports showing weakness in retail sales and surprising resilience in inflation sent the S&P 500 index down 9%

By Will Andrews and Karyn McCormack

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U.S. stocks headed sharply lower Wednesday after a round of data showed more weakness in the U.S. economy and surprising resilience in inflation. The S&P 500 index, a key barometer of the stock market, plunged 9%, while the Dow Jones Industrial average lost nearly 8% -- the worst percentage drop since 1987's crash.

The gloom was pervasive Wednesday. In a speech, Federal Reserve Chairman Ben Bernanke said credit markets will take time to unfreeze and called for action on the "too-big-to-fail" problem involving U.S. financial institutions. The Fed's Beige Book survey of economic conditions suggests a difficult path for the rest of the year. Earlier, San Francisco Fed President Yellen said the U.S. economy is in a recession.

The market has almost wiped out the gains from Monday's historic rally.

"There's still a market feeling of distrust," says Richard Sparks, senior equities analyst at Schaeffer's Investment Research. Investors sold stocks Wednesday after seeing the bad news about retail sales and inflation. "We still have a very delicate market and tenuous situation," he says, with traders selling at any opportunity and distrusting any sign of a market bottom.

On Wednesday, selling picked up in the final hour of trading, leaving the Dow Jones industrial average down 733.08 points, or 7.87%, to 8,577.91. It's the largest percentage drop in the Dow since the 1987 stock market crash -- when it fell 22.6%. The 30-stock index is now about 126 points above the year's closing low of 8,451.19 on Oct. 10.

The S&P 500 index plunged 90.17 points, or 9.03%, to 907.84. The Nasdaq composite index dropped 150.68 points, or 8.47%, to 1,628.33.

Oil stocks plunged as November WTI crude oil futures skidded $4.73 to $73.90 a barrel on Wednesday as hedge funds liquidated positions amid worries that the world is heading into a recession that will reduce demand. Also, OPEC cut its 2009 forecast for world demand for its crude.

Investors fled to the safety of bonds, sending yields lower. The U.S. dollar index and gold futures were higher.

The economic outlook is not looking pretty. The Fed's Beige Book released Wednesday afternoon said economic activity weakened in September, and that credit conditions tightened across the country. There was increased pessimism regarding the economic outlook. Housing weakened in most areas, while hiring slowed and wage pressure "remained limited." Manufacturing slowed in most areas while nonfinancial services experienced weakness in most districts as well. About the only bright spot economically speaking was a positive outlook on agriculture and natural resource industries.

In other economic news Wednesday, the U.S. producer price index fell 0.4% overall in September, while the core rate rose 0.4%, following August's 0.9% headline decline and 0.2% increase in the core index. On a year-over-year basis, headline PPI slowed to a 8.7% pace from 9.6% as of July; the core rate rose to 4.0%, however, from 3.6%. Energy prices fell 2.9% but are up 22.4% year-over-year. Gasoline prices were down 0.5% on the month, but are still up 39.5% year-over-year. Passenger car prices rose 0.5%. Civilian aircraft prices were up 0.6%. Food prices edged up 0.2% and are up 8.1% year-over-year compared to 9.1% previously.

"The mix of data aren't really good news for the markets with the core rate rising to 4.0%, but that could be considered old news as many expect the slowdown in the economy will tame price pressures," says Action Economics.