Traders work Monday on the floor of the New York Stock Exchange.
The market spent the day absorbing a litany of bad news that convinced investors that the optimism that fed a 1,276-point gain over five sessions was premature. Stocks first slid on initial reports that the first weekend of the holiday shopping season, while better than some retailers and analysts feared, saw only modest gains. That had Wall Street worried that the rest of the season would be disastrous, a troubling possibility not only for retailers but for an economy that is dependent on consumer spending for its growth.
According to figures released by ShopperTrak RCT, a research firm that tracks total retail sales at more than 50,000 outlets, sales over Friday and Saturday rose just 1.9 percent.
Meanwhile, downbeat economic reports on the manufacturing sector and construction spending only added to investors' concerns. Speeches from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson also did little to assuage investors about the downturn.
The day's news reminded investors that the economy is still in serious trouble. Then, at midday, Wall Street got confirmation of what everyone has suspected for months, that the nation is indeed in a recession. The National Bureau of Economic Research, considered the arbiter of when the economy is in recession or expanding, said the U.S. recession had begun a year ago, in December 2007.
That assessment made the retail sales figures all the more unnerving.
"Unfortunately, two-thirds of the American economy is based on the spending of the American consumer," said Mike Stanfield, chief executive of VSR Financial Services. "When the consumer pulls back, it's very hard for the economy to gain much traction."
Investors had been hopeful that last week's rally -- when the major indexes shot up by double digit percentages -- was a sign that some stability had returned to a market badly shaken by months of discouraging economic data. But analysts expect economic concerns to weigh on the market for some time to come.
"Everyone knows the recession is on us, the question is now will it be short and shallow or long and severe," Stanfield said.
Chuck Widger, chief executive of investment management firm Brinker Capital, expects the volatility to continue until investors have better visibility on the future.
"Investors are looking for better data on the economy," he said. "We've got baked in pretty nasty assumptions for the economy this quarter. The markets are looking ahead to the first quarter for data that will confirm or deny the bad news."
Although Monday's plunge was notable because it cut short a five-day rally -- the first such winning streak for the Dow and the Standard & Poor's 500 index since July 2007 -- it also fit what has become a pattern on Wall Street. The market has made a number of big, optimistic moves higher, including triple-digit gains in the Dow, only to quickly give them back as another batch of bad news arrives.
The Dow fell 679.95, or 7.70 percent, to 8,149.09, its fourth-largest point drop ever. The S&P 500 index dropped 80.03, or 8.93 percent, to 816.21. This was the worst point and percentage drop for both blue chip indexes since Oct. 15.
The Nasdaq composite index fell 137.50, or 8.95 percent, to 1,398.07. The Russell 2000 index of smaller companies fell 56.07, or 11.85 percent, to 417.07.
Only 218 stocks were in positive territory on the New York Stock Exchange while 2,693 declined. Volume came to 1.62 billion shares.
Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.76 percent from 2.92 percent Friday. The yield on the three-month T-bill, considered one of the safest investments and an indicator of investor sentiment, slipped to 0.02 percent from 0.05 percent Friday. The lower the yield, the more anxious investors tend to be.
The market received no relief after a pair of speeches from Paulson and Bernanke about the economy.
Paulson said the administration is looking for more ways to tap a $700 billion financial rescue program and will consult with Congress and the incoming Obama administration. The program has distributed $150 billion out of the $250 billion earmarked to buy stock in banks as a way to boost their resources so they can lend more.
He said the administration is looking at other ways to utilize the rescue package, including alternatives for providing capital to financial institutions.
Meanwhile, Bernanke said in another speech Monday that further interest rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive the economy. The central bank's key interest rate now stands at 1 percent, a level seen only once before in the last half-century.
Many economists predict policymakers will drop the rate again at their next meeting on Dec. 15-16. And, there have certainly been enough weak economic news to compel the Fed to make another cut.
There was no shortage of disappointing economic news on Monday. The Institute for Supply Management, a trade group of purchasing executives, said its index of manufacturing activity fell to a 26-year low in November. Meanwhile, the Commerce Department said construction spending fell by a larger-than-expected amount in October.
Stanfield also said investors have lost some confidence in recent moves by the government to bolster the financial system. "The financials are still lagging, which in my opinion shows a lack of confidence in Paulson and the undertaking of the Fed and the Treasury," he said.
Analysts say investors have been frustrated by the government's change in strategy as it implements its $700 billion financial bailout program; the Treasury originally said it would buy soured mortgage debt from banks, then decided to buy stock in the banks. Last week, with the rescue of Citigroup Inc., the government again said it was buying the bank's failed debt.
The government injected a fresh $20 billion into the banking giant and said it would guarantee up to $306 billion of the bank's risky assets. Banking stocks were among the biggest sectors pulling the overall market down on Monday.
Citigroup tumbled $1.84, or 22.2 percent, to $6.45. Morgan Stanley shares dropped $3.40, or 23.1 percent, to $11.35. Goldman Sachs Group Inc. fell $13.23, or 16.7 percent, to $65.76.
Retailers were among the day's poorest performers. Wal-Mart Stores Inc. fell $2.87, or 5.1 percent, to $53.01, while JCPenney Co. tumbled $2.44, or 12.8 percent, to $16.55.
Light, sweet crude dropped $5.15 to settle at $49.28 a barrel on the New York Mercantile Exchange after OPEC decided not to cut production at an informal meeting in Cairo on Saturday. The Organization of the Petroleum Exporting Countries, which accounts for about 40 percent of global supply, reduced output quotas in October by 1.5 million barrels a day.
The dollar fell against other major currencies. Gold prices also fell.
Overseas, Japan's Nikkei stock average fell 1.35 percent. At the close, Britain's FTSE 100 was down 5.19 percent, Germany's DAX index was down 5.88 percent, and France's CAC-40 was down 5.59 percent.