Stocks: A Terrible Thursday

Major U.S. indexes each tumbled nearly 3% as worries intensified over the health of the economy. All eyes are on Friday's jobs report

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Market players were probably wondering Thursday why they bothered to come back from their summer vacations.

U.S. stocks suffered an all-out rout on Thursday as the market's mood turned quite dark. Investors dumped stocks amid jitters about prolonged economic pain deepened on weaker labor-market data, generally negative retail sales reports for August, and a stark warning on sinking asset values from bond-market guru Bill Gross. Major equity indexes each finished lower by nearly 3%.

Oil prices gave up early gains to trade lower as the dollar gained upward traction.

On Thursday, the Dow Jones industrial average plunged 344.65 points, or 2.99%, to finish at 11,188.23. The broader S&P 500 index fell 38.16 points, or 2.99%, to end at 1,236.82. And the tech-heavy Nasdaq composite index dropped 74.69 points, or 3.20%, to 2259.04.

The selloff in stocks accelerated after the S&P 500 broke below the 1262 level on mounting worries that more hedge funds might be in trouble and growing uncertainty about the economic outlook with a changing of the guard in Washington, S&P MarketScope said. On the New York Stock Exchange, 25 stocks traded lower for every five that posted gains, while on the Nasdaq the ratio was 22-5 negative amid slow trading. Boeing Co. (BA) shares were down on a strike threat, with financial stocks also falling.

Investors may have been digesting the comments made in the Federal Reserve's Beige Book, released on Sept. 3, and thinking that, after a 3.3% growth rate in U.S. Gross Domestic Product, the second half of 2008 is starting to look weaker, says Brian Gendreau, an investment strategist at ING Investment Management in New York.

In addition, there's a rotation between sectors occurring due to the turnaround in the dollar, with the globalized sectors -- energy, materials and technology -- which benefited from the weaker dollar, getting whacked, while more domestically oriented sectors such as financials and consumer discretionary stocks in general have been rising since the market lows of mid-July, Gendreau says.

The Philadelphia Semiconductor Sector Index dropped more than 3.0%, breaking below its 52-week range, as technology names got battered on worries that spending on technology will be severely curtailed due to the global economic slowdown. Intel (INTC), Advanced Micro Devices (AMD) and Texas Instruments (TXN) were all down more than 4%.

There are fresh signs that financial firms won't find it so easy to replenish the capital on their balance sheets. Merrill Lynch & Co. (MER) has hit a snag in its talks to sell a significant portion of its bad loans to Korea Asset Management Corp. due to disagreement over price, the Korean firm's CEO told Bloomberg News. Failure to reach a deal may suggest that Merrill, the third-largest U.S. securities firm, and Lehman Brothers Holdings (LEH) might have to cut prices for the assets they're trying to sell in order to raise capital as mortgage-related losses widen.

That and related remarks by PIMCO bond fund manager Bill Gross in his September Investment Outlook, were also likely helping to deepen investor pessimism toward the markets. Gross said in his monthly letter on the PIMCO website that with liquidity drying up and private investors getting more wary of risking their own capital, substantial new sources of buying are needed in order to prevent much more destructive asset deflation.