Stocks Tumble amid Economic Fears

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The U.S. stock market declines followed Tuesday's stock market action, in which the Dow fell 2.5%, the S&P 500 dropped 3.08%, and the Nasdaq shed over 4%.

Markets overseas were also hit with heavy selling. London's FTSE 100 index dropped 4.46%, Frankfurt's DAX index tumbled 4.46%, and the CAC 40 index in Paris sank 5.10%. Japan's Nikkei 225 index finished with a steep loss of 6.8% Wednesday, Hong Kong's Hang Seng index skidded 5.15%, and Shanghai's benchmark index fell 3.20%.

On Wednesday, traders also examined a fresh round of earnings reports featuring marquee names like Apple (AAPL), Merck (MRK), AT&T (T), and McDonald's (MCD).

The focus in the U.S. was on a domestic economy that appears headed into a steep recession, even as the credit crunch shows signs of easing. Indeed, both Treasury Secretary Henry Paulson and Minneapolis Fed President Gary Stern warned the U.S. faces a potentially lengthy economic slowdown in speeches Tuesday night.

The stock market is now priced for the expectation of a "severe recession" in the U.S., says Dave Hinnenkamp, chief executive of KDV Wealth Management. "People are preparing for the worst," he says.

Treasury Secretary Paulson said Tuesday night there were signs that the credit freeze -- which affected not only loans to consumers and businesses, but also lending between banks -- was beginning to thaw after a round of measures by Treasury and the Fed to boost liquidity and try to bolster market confidence. Nonetheless, he warned there may be "a number of difficult months" ahead before conditions improve. "We have a resilient economy but it will take time," Paulson said.

According to a Bloomberg report, investors are taking losses of up to 90% in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings and Icelandic banks send shockwaves through the global financial system. The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

The Federal Reserve announced it will alter the formula used to determine the interest rate paid to depository institutions on excess balances. Previously, the rate on excess balances had been set as the lowest federal funds rate target established by the Federal Open Market Committee (FOMC) in effect during the reserve maintenance period minus 75 basis points. Under the new formula, the rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period less 35 basis points. This change will become effective for the maintenance periods beginning Thursday, Oct. 23.

World leaders will meet Nov. 15 in Washington to address the global financial crisis -- the first in a series of summits to mitigate what economists predict could be a long and deep downturn, a senior Bush administration official said. AP reported the first meeting will be held to discuss underlying causes of the financial crisis, review progress being made to address it and start developing reforms needed to ensure it does not happen again, the official said, speaking on condition of anonymity because the summit had not been formally announced.

Among companies whose earnings were being watched Wednesday, Wachovia (WB) managed to mark a milestone for the financial sector with a record $23.9 billion third-quarter loss. The company posted a per-share loss of $11.18, vs. 85 cents EPS one year earlier, as $18.8 billion of goodwill impairment, a $4.8 billion credit reserve build, $2.5 billion in market disruption losses, and a $310 million principal investing loss offset a 9.9% rise in net interest income. The company posted a $2.23 third-quarter 2008 loss excluding goodwill impairment of $18.7 billion after tax and net merger-related and restructuring expense of $414 million.

Apple posted fiscal fourth quarter EPS of $1.26, vs. $1.01 one year earlier, on a 35% revenue rise and a widened gross margin. International sales accounted for 41% of the current quarter's revenue. However, Apple says visibility into future results is low. The company sees first-quarter EPS of $1.06-$1.35 on revenue of $9.0-$10.0 billion.

Yahoo! Inc. (YHOO) posted third-quarter non-GAAP EPS of 9 cents, vs. 11 cents one year earlier, as higher operating expenses offset a 1% revenue rise.

Merck posted third-quarter non-GAAP EPS of 80 cents, vs. 75 cents one year earlier, on a 2.1% sales drop. The drugmaker said its 2008 global restructuring efforts are expected to reduce its workforce by 12%. It sees 2008 non-GAAP EPS of $3.28-$3.32 that adjusts for certain items, and 2008 GAAP EPS of $3.45-$3.55.

AT&T reported third-quarter EPS of 55 cents, vs. 50 cents one year earlier, on a 4% revenue rise. The company posted adjusted EPS for the current quarter of 67 cents. Wall Street was looking for 71 cents.

Boeing (BA) posted third-quarter EPS from continuing operations of 94 cents, vs. $1.43 one year earlier, on a 7.4% revenue drop. The company noted the impact of the ongoing machinists' strike, as well as supplier production challenges on customer-furnished galleys for certain wide-body airplanes.

McDonald's proved a relative oasis of strength, posting third-quarter EPS from continuing operations of $1.05, vs. 83 cents one year earlier, on 4.7% higher U.S. comparable-store sales and 7.1% higher global comp sales.

Shares of SanDisk Corp. (SNDK) plunged after Samsung Electronics Co. announced it had withdrawn its unsolicited, non-binding proposal to acquire SanDisk for $26 per share in cash.

Renault has denied rumors that it has offered to help buy a stake in Chrysler. Market rumors Wednesday morning had suggested the Nissan-Renault group could take a 20% stake in the struggling US automaker. Chrysler has also been mentioned in a possible combination with General Motors (GM).