NEW YORK - Dejected investors sent stocks plunging Thursday, hurtling the Dow Jones industrials down more than 340 points after retailers and the government added to a mountain of bad economic news and devastated hopes for a late-year recovery.
The market was already nervous as it waited for the government to release its August employment report on Friday. So news from the nation's major retailers that shoppers curtailed their spending last month due to higher gas and food prices came as a heavy blow.
Wal-Mart Stores Inc., the world's largest retailer, beat expectations because of its big discounts, but many teen retailers and luxury chains did poorly, a sign that consumers are spending mostly on essentials and putting discretionary buying on hold.
Meanwhile, the Labor Department said new applications for unemployment insurance rose by 15,000 last week from the previous week. That broadly missed expectations for a fourth-straight week of declines, heightening worries that the average American — already feeling the effects of the weak housing market — will have even less means to spend.
Furthermore, if the job market keeps deteriorating, it is tough for Wall Street to see a rebound in sight for the economy's biggest culprit: the tumbling housing market.
"You have to have a paycheck to pay that mortgage," said Craig Peckham, market strategist at Jefferies & Co.
The numbers released Thursday were a sign that despite some upbeat reports over the past month, the economy remains deeply troubled. Investors are not expecting any promising news in the August jobs report, particularly after the ADP National Employment Report said that private sector employment decreased in August by 33,000. Economists are predicting the government will report the eighth straight monthly payrolls drop, and a rise in the unemployment rate.
The market was so disheartened that it showed little reaction when the Institute for Supply Management said the service sector grew unexpectedly in August for the first time in three months as new orders increased and inflation moderated. The August reading of 50.6 was higher than the 50.0 expected, and the reading of 49.2 in July; but the sector's edging above the threshold between contraction and expansion was hardly a sign of a robust economy.
An economic recovery appears to be far off to investors — and with the Dow down more than 15 percent for the year so far, they don't appear to be holding out for a significant upturn in stocks, either.
"We're seeing nothing but sellers," said Ted Oberhaus, director of equity trading at Lord, Abbett & Co. "In a bear market, you sort of really don't need an excuse to sell."
The Dow fell 344.65, or 2.99 percent, to 11,188.23. It was the worst drop for the blue-chip index since June 26, when it fell more than 358 points, or 3.03 percent.
Broader indexes also tumbled. The Standard & Poor's 500 index fell 38.15, or 2.99 percent, to 1,236.83, and the Nasdaq composite index dropped 74.69, or 3.20 percent, to 2,259.04.
All three indexes moved back into bear market territory, defined as a 20 percent drop from a recent peak. The indexes were at highs, including a record 14,198.09 for the Dow, last October.
As investors fled stocks, they turned to the safety of government bonds, sending Treasury prices higher. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.62 percent from 3.70 percent late Wednesday.
Not even another drop in oil could console investors. After the government reported a lower-than-expected drop in U.S. gasoline and crude supplies, light sweet crude fell $1.46 to settle at $107.89 a barrel on the New York Mercantile Exchange. Crude is about $30 below its July 11 high of $147.27. Gold prices also slid Thursday.
News about housing didn't help the market. Toll Brothers Inc. CEO Robert Toll said he is seeing signs the housing market is stabilizing, but Ara Hovnanian — CEO of Hovnanian Enterprises Inc. — said he sees no evidence yet of a market bottom. The stock market appeared to agree with the latter sentiment, sending homebuilder stocks sharply lower.
Toll Brothers performed better than its peers, even after posting a third-quarter loss; its shares rose 27 cents to $25.07. But shares of Hovnanian, which on Wednesday reported a quarterly loss, sank $1.35, or 17.4 percent, to $6.40. Pulte Homes Inc. fell 86 cents, or 5.8 percent, to $12.05, and KB Home fell $1.22, or 5.7 percent, to $20.11.
The financial sector fared poorly on Thursday as well, particular after bond fund manager Bill Gross wrote in a commentary on his firm's Web site that the U.S. Treasury needs to provide funding to mortgage financiers Fannie Mae and Freddie Mac.
Freddie shares fell 30 cents, or 5.6 percent, to $5.08, and Fannie shares fell 65 cents, or 8.9 percent, to $6.67.
The biggest decliners among the 30 Dow components were three financial stocks: Bank of America Corp., which fell $2.36, or 7.2 percent, to $30.60; Citigroup Inc., which fell $1.31, or 6.7 percent, to $28.30; and American International Group Inc., which fell $1.36, or 6 percent, to $21.22.
Wal-Mart's stock ended down only a penny at $59.78, after it said sales of groceries and back-to-school products helped its August same-store sales rise 3 percent, above expectations.
But the discount chain's success was seen as the corollary of a cash-strapped consumer, and other retailers fell. JCPenney Co. fell $2.07, or 5 percent, to $39.57, while Gap Inc. fell 83 cents, or 4.2 percent, to $19.14.
The Russell 2000 index of smaller companies fell 23.29, or 3.14 percent, to 718.62.
Declining issues outpaced advancers by about 5 to 1 on the New York Stock Exchange, where consolidated volume came to 5.11 billion shares, up from 4.94 billion shares on Wednesday.
Overseas, the Bank of England and European Central Bank left their benchmark interest rates unchanged — a move analysts expected, as both regions face rising inflation and slowing economic growth.
The ECB also decided to make it more expensive for banks to borrow from the central bank against risky assets — another worry weighing on investors' minds, Jefferies' Peckham said.
Britain's FTSE 100 fell 2.50 percent, Germany's DAX index fell 2.91 percent, and France's CAC-40 shed 3.22 percent. Japan's Nikkei stock closed down 1.04 percent.