(AP Photos/Bebeto Matthews)
Stocks and interest rates plunged Tuesday after signs of slowing economies from China to the U.S. spooked traders who were already uneasy about a global recovery. The Dow Jones industrial average fell 268 points, or 2.7 percent, and dropped below 10,000. The benchmark Standard & Poor's 500 index dropped 3.1 percent to close at its lowest level since October.
Interest rates fell in the Treasury market after demand for the safety of government debt grew. The yield on the 10-year note dropped to 2.95 percent, the first time it has fallen below 3 percent since April 2009, when the markets were in the early stages of their recovery from the financial crisis. The yield is used as a benchmark for many consumer loans and mortgages. The yield on the two-year note hit a new low.
The markets began the day by following Asian and European stocks lower. Asian exchanges fell after an index that forecasts economic activity for China was revised lower. European stocks continued the slide after Greek workers walked off the job to protest steep budget cuts.
Then, shortly after U.S. trading began, the market was hit with news that consumer confidence fell sharply this month because of worries about jobs and the overall economy.
The Conference Board's Consumer Confidence Index fell to 52.9 from a revised 62.7 in May. It was the steepest drop since February and economists polled by Thomson Reuters had forecast only a modest dip.
Investors are also anxious as they wait for the Labor Department's monthly employment report on Friday. Companies have indicated that business is getting better, yet there are few signs that they are ready to hire in big numbers. The government is expected to say that the unemployment rate rose 0.1 percentage point to 9.8 percent in June.
Industrial stocks suffered some of the steepest drops on fears that a stalled global rebound will cut demand. Aircraft maker Boeing Co. led the Dow lower with a drop of 6.3 percent. Caterpillar Inc., the maker of construction and mining equipment, lost 5.5 percent. Shares of coal producers pulled energy stocks lower on worries about a slowdown.
Investors have been so burned by the financial crisis of 2008-09 that they fear any hint of a slowdown means the economy will start tanking again. And they're selling heavily at the end of the day, fearful about negative economic news that could start coming out of Asia just hours after U.S. trading ends.
Paul Zemsky, head of asset allocation at ING Investment Management in New York, said investors are wrestling with two opposing ideas of where the economy is headed. He said the more likely case is that the recovery continues and corporate earnings growth make stocks look cheap right now. The darker scenario is that government budget cuts, the end of fiscal stimulus, problems in Europe and a slowdown in China lead to a double-dip in the global economy.
Investors' indecision and uneven economic reports have brought big swings to stocks since late April when debt problems in Greece began to pound world markets.
"The central issue that any investor faces today is fire or ice," Zemsky said. "There's no in-between. It's either one or the other."
The Dow fell 268.22, or 2.7 percent, to 9,870.30, its lowest close since June 7. During the last hour, the Dow was down 326.60. The Dow has fallen 428 points, or 4.2 percent, in the past four days.
The Standard & Poor's 500 index fell 33.33, or 3.1 percent, to 1,041.24. It was the lowest close for the S&P since Oct. 5 and the fifth drop of more than 3 percent in the past year. The index is now down 14.5 percent from its 2010 peak in April.
The Nasdaq composite index fell 85.47, or 3.9 percent, to 2,135.18.
Only about 260 stocks rose while about 2,840 fell at the New York Stock Exchange, where consolidated volume came to 6.3 billion shares, compared with a light 3.9 billion Monday.
Mike Shea, managing partner at Direct Access Partners LLC in New York, took some comfort in the fact that the market closed off its lowest level of the day. That signaled that some buyers were willing to step in.
"Getting that little pop at the end of the day -- it's kind of losing a football game 35-0 and then scoring a touchdown in the last five minutes," he said.
Shea cautioned that trading could continue to be volatile Wednesday, which is the final day of the quarter and the first half. For some traders, it's the last day of their fiscal year. "The market can be a little wacky on the last days of quarters," he said.
Crude oil fell $2.31 to $75.94 per barrel on the New York Mercantile Exchange.
The yield on the two-year Treasury note traded as low as 0.59 percent, below the 0.60 percent from December 2008 during the peak of the financial crisis.
The Chicago Board Options Exchange's Volatility Index rose 17.7 percent. The VIX is known as the market's fear gauge because a rise signals traders are expecting more drops in stocks.
Zemsky said there isn't much until the start of corporate earnings reports next month that likely will give investors solid answers about the direction of the economy. Until then, Friday's June jobs report is the one standout. Even with a good report, investors might still be focused on earnings. The May jobs numbers were a disappointment because private employers hired only 41,000 workers.
"I don't think Friday payrolls can do a lot to bring the market a whole lot higher if they're good. But if they're bad, it's really 'Look out below,"' Zemsky said.
A drop in the euro to $1.2181 was another sign of traders' nervousness. A slide in the 16-nation currency has for months indicated fading confidence in Europe's ability to handle big budget deficits.
Greece is required to make the cuts under terms of a bailout from other European Union members and the International Monetary Fund. Protests over government cost-cutting in Greece renewed concerns about how well European countries will be able to stick to austerity plans.
In other trading, Chinese markets fell after the Conference Board's Leading Economic Index for China was revised to 0.3 percent for April from 1.7 percent.
Boeing fell $4.26, or 6.3 percent, to $63.04 and Caterpillar, also a Dow stock, fell $3.55, or 5.5 percent, to $60.85.
Coal company Peabody Energy Corp. fell $3.16, or 7.4 percent, to $39.33, while mining company Massey Energy Co. fell $2.25, or 7.5 percent, to $27.95.
The Russell 2000 index of smaller companies fell 25.58, or 4 percent, to 615.96.
The Shanghai composite index fell 4.3 percent to a 14-month low. Japan's Nikkei stock average fell 1.3 percent. Britain's FTSE 100 fell 3.1 percent, Germany's DAX index dropped 3.3 percent, and France's CAC-40 fell 4 percent.