Stocks fall as investors worry about low consumer spending

NEW YORK -- Investors are finding out what everybody else already knew: The consumer isn't going to spend the economy into recovery.

Major U.S. stocks indexes tumbled by the biggest amount in six weeks Monday as investors grew worried that they have been too quick to bet on an economic rebound during the market's five-month rally. Overseas markets and commodities plunged, and demand for safe-haven investments sent the dollar and Treasury prices shooting higher.

The Dow Jones industrial average skidded 186 points and all the major indexes fell at least 2 percent. The Nasdaq composite index was hardest hit, dropping 2.8 percent, but it also has had the biggest advance as Wall Street rallied this year.

A shudder in China's main stock market touched off a wave of selling that spread to Europe and then the U.S. A slide in quarterly profits at home-improvement retailer Lowe's Cos. only added to worries that an improvement in the economy is far off.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the selling was warranted.

"The economics obviously don't support where we've been," he said.

The slide was steep but felt more controlled than the plunges of the past year because stocks ended off of their worst levels and because analysts have been calling for a retreat after the Dow and Standard & Poor's 500 index raced up 15 percent in only five weeks.

The Shanghai stock market tumbled 5.8 percent Monday as investors worried the Chinese government would tighten bank lending policies. Investors outside China have been hoping that strengthening there would spill over to other economies.

Worries grew when Lowe's said consumers are holding off on some purchases. That's troubling because consumer spending accounts for more than two-thirds of U.S. economic activity.

Some investors used to seeing a quick bounceback in stocks have underestimated how difficult the recovery could be, even though many analysts have warned that it could take well into 2010 for the economy to regain strength. And some traders seem to be in the same mindset as three years ago, willing to take big chances even when there's little economic or corporate evidence to justify a huge advance.

Now, with consumers facing high unemployment, weak home prices and mounds of debt, investors are worrying that they had grown too optimistic even though the stock market tends to improve before the economy after a recession.

Quincy Krosby, market strategist for Prudential Financial, said some investors are worried that weakness among consumers will hold the economy back.

"Those who are negative say you are not going to see consumers loosen those purse strings in any meaningful way," she said.

The Dow fell 186.06, or 2 percent, to 9,135.34, its lowest close since July 29. The Dow had been down almost 205 points at its low of the day. It was the second straight drop in the index and its sixth in the past nine days. Stocks fell Friday after weak reports on consumer sentiment and retail sales.

The broader S&P 500 index, which is the basis for many investments like mutual funds, fell 24.36, or 2.4 percent, to 979.73. Last week it was up 49.7 percent from a 12-year low of 676 in early March.

It was the biggest slide for the Dow & the S&P 500 index since July 2, when a weak employment report fanned worries about the economy and pushed stocks down more than 2.5 percent.

The Nasdaq fell 54.68, or 2.8 percent, to 1,930.84, its biggest drop since June 22.

About 2,700 stocks fell while only 335 rose on the New York Stock Exchange, where consolidated volume came to a light 5 billion shares and was essentially flat with Friday.

The Dow Jones Wilshire 5000 index, which reflects nearly all stocks traded in America, fell 2.5 percent. That's a paper loss of about $299 billion.

Meanwhile, the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.47 percent from 3.57 percent late Friday.

Many analysts say stocks have piled on gains too quickly.

"We have come an awful long way. To not expect a sell-off after the degree of increase -- I think you're dreaming," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston.

The Chicago Board Options Exchange's Volatility Index, also known as the market's fear index, surged 14.9 percent, its biggest one-day increase since April. The VIX stands at 27.9 and is down 30 percent in 2009 and its historical average is 18-20. It hit a record 89.5 in October at the height of the financial crisis.

Overseas, Japan's Nikkei stock average fell 3.1 percent as investors weren't satisfied by news that the country had emerged from recession in the second quarter. Britain's FTSE 100 fell 1.5 percent, Germany's DAX index lost 2 percent, and France's CAC-40 fell 2.2 percent.

Commodities prices fell as investors worried demand would fall. A barrel of crude oil fell 76 cents to settle at $66.75 on the New York Mercantile Exchange. It is down more than 5 percent in two days.

Among stocks, Lowe's fell $2.36, or 10.3 percent, to $20.47. Consumer staples stocks fared best as investors looked for safety. Coca-Cola Co. rose 23 cents to $48.70.

The dollar rose against other major currencies, while gold prices fell.

The Russell 2000 index of smaller companies fell 15.72, or 2.8 percent, to 548.18.