Recession worries sink stocks

Increasing fears that the nation is headed for a recession -- or, indeed, may already be in one -- drove the stock market sharply lower Friday, closing out a third straight losing week.

Investors pushed aside the prospect of more interest rate cuts by the Federal Reserve, as well as news of Bank of America’s proposed rescue of Countrywide Financial. They focused instead on weak earnings forecasts from some major firms as a signal that consumers -- whose spending accounts for two-thirds of the economy -- may be tapped out.

Fed Chairman Ben S. Bernanke’s pledge Thursday to make “substantive” interest rate cuts seemed to fall on deaf ears. The market opened lower and never broke into positive territory.

The Dow Jones industrial average slumped 246.79 points, or 1.9%, to 12,606.30, though it held above its recent closing low of 12,589 reached Tuesday.

The broader Standard & Poor’s 500 index tumbled 19.31 points, or 1.4%, to 1,401.02, also a bit above Tuesday’s close.

Some other indexes dropped through their Tuesday lows: The Russell 2,000 small-stock index slid 2.2% to 704.56, a new 16-month low.

Unlike in many recent sessions, the sell-off Friday was led by sectors other than financial stocks. Within the S&P; 500, telecom, technology, industrial and retail shares were hard hit.

The tech-dominated Nasdaq composite lost 48.58 points, or 2%, to 2,439.94, its lowest close since April.

Stocks are off to one of their worst starts in years. The Dow is down 5% this year; the Nasdaq index has fallen 8%.

Jeweler Tiffany & Co. shook the retail sector Friday by reporting weaker-than-expected holiday sales and warning that it might lower its 2008 earnings forecast. The company’s shares plunged $4.52 to $35.80.

Also, American Express fell $4.92 to $44 after saying credit card delinquencies were rising and that it would miss first-quarter earnings targets.

The Dow had tumbled 238 points on Tuesday in part because of a warning from AT&T; about delinquencies among its phone and Internet customers.

For months, investors have worried about the inability of many sub-prime mortgage holders to meet loan payments. But those borrowers tend to be financially challenged in general.

By contrast, warnings from Tiffany, AmEx and AT&T; may indicate that higher gasoline prices and tougher credit terms are starting to bite more upscale consumers as well, analysts say.

“You’ve got AmEx talking about increased credit card defaults and Goldman Sachs and Merrill Lynch [economists] saying we’re probably in the middle of a recession -- the market is trying to come to grips with all of that right now,” said Ernie Ankrim, chief investment strategist at Russell Investment Group in Tacoma, Wash.

The resilience of consumers has supported the economy, and by extension the stock market, for years. But with housing prices falling or stagnant in most of the country and banks pulling in their horns, it is harder for consumers to fuel spending by borrowing against their homes.

The market’s next big challenge will be getting through the barrage of earnings reports due in the next few weeks, analysts say. Investors will be paying close attention to companies’ profit forecasts for 2008.

Financial giants Merrill Lynch and Citigroup will issue results next week. Merrill was reported by the New York Times to be preparing a $15-billion write-down of mortgage-related investment losses -- a far bigger number than anticipated. But its shares gained $2.66 to $54.69 on Friday.

“Merrill may say, ‘We’re going to start from scratch. This is our number. The worst is behind us,’ ” said Dan McMahon, a trader at CIBC World Markets.

He noted that the world’s biggest brokerage might be in an ideal position to wipe the slate clean, given that its chief executive, John A. Thain, took the job only a month ago and can’t be blamed for the mess he found.

There has been some grumbling on Wall Street that Bernanke’s Fed is “behind the curve” -- not reacting quickly enough to signs of a flagging economy.

Joe Saluzzi, co-head of equity trading at Themis Trading, said the blame was misdirected -- or, more precisely, mistimed. The Fed, he said, ought to be criticized less for its recent moves than for its lax oversight of the mortgage-banking sector during the years that it took for the sub-prime mess to develop.

In any case, it will take more than the half-percentage-point rate cut expected at the Fed’s Jan. 30 meeting to restore investors’ confidence, Saluzzi said.

Among Friday’s market highlights:

* Retail stocks falling with Tiffany included Coach, down $2.02 to $26.85; Nordstrom, down $1.63 to $31.47; and Kohl’s, off $2 to $38.33.

* In the tech sector, Apple slid $5.33 to $172.69 and IBM lost $2.25 to $97.67.

* Financial stocks were mixed. Bank of America fell 80 cents to $38.50 after agreeing to buy Countrywide, but Citigroup added 45 cents to $28.56 on rumors that it might get a cash infusion from foreign investors.

* Some investors sold stocks and bought Treasury bonds, pushing yields lower. The 10-year T-note yield fell to 3.79% from 3.89% on Thursday.

* In commodities trading, gold futures hit another record high, adding $4.40 to $896.10 an ounce in New York. But oil fell again, with near-term futures down $1.02 to $92.69 a barrel.

--

thomas.mulligan@latimes.com