Investors agonizing over a faltering economy sent the stock market plunging all over again Wednesday after two disheartening reports convinced Wall Street that a recession, if not already here, is inevitable.
The market's despair — fed by a stream of disheartening economic data — propelled the Dow Jones industrials down 733 points to their second-largest point loss ever, and the major indexes all lost at least 7 percent.
The slide meant that the Dow, which lost 76 points on Tuesday, has given back all but 126 points of its record 936-point gain of Monday, which came on optimism about the banking system in response to the government's plans to invest up to $250 billion in financial institutions.
Wednesday's selloff began after the government's report that retail sales plunged in September by 1.2 percent — almost double the 0.7 percent drop analysts expected — made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market.
The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy following stepped up government efforts to revive the stagnant lending markets.
Then, during the afternoon, the release of the Beige Book, the assessment of business conditions from the Federal Reserve, added to investors' angst. The report found that the economy continued to slow in the early fall as financial and credit problems took a turn for the worse. The central bank's report supported the market's belief that difficulties in obtaining loans have choked growth in wide swaths of the economy.
"Even though the banking sector may be returning to normal, the economy still isn't. The economy continues to face a host of other problems," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "We're in for a tough ride."
Fed Chairman Ben Bernanke offered a similar opinion, warning in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.
"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," he told the Economic Club of New York.
Analysts have warned that the market will see continued volatility as it tries to recover from the devastating losses of the last month, including the nearly 2,400-point plunge in the Dow over the eight sessions that ended Friday. Such turbulence is typical after a huge decline, but the market's anxiety about the economy was also expected to cause gyrations in the weeks and months ahead.
Selling accelerated in the last hour of trading, a common occurrence during the eight-days of heavy declines. One reason for the heavy selling: Mutual funds need to unload stock to pay investors who are bailing out of the market.
Investors apparently have come to believe that Monday's big rebound was overdone given the problems elsewhere in the economy.
"It really doesn't come as a shock after Monday's gains were I think a little bit excessive," said Charles Norton, principal and portfolio manager at GNICapital, referring to the market's pullback.
He contends that the government has taken so many steps that investors must now wait for some of the actions to help steady the economy.
"It seems like all the tools in the tool chest have mostly been used now and now it's back to reality," he said. "We're still faced with the fact that the economy is slowing and earnings aren't very good."
Doubts about the economy were already surfacing in Tuesday's session, when investors halted an early rally and began collecting profits from stocks' big Monday advance. Wednesday's data confirmed the market's fears that the economy is likely to remain weak for some time, and that corporate profits are likely to suffer.
Mark Coffelt, portfolio manager at Empiric Funds, said moves by European and U.S. government officials to begin investing directly in banks are easing worries about credit. But the steep pullback in stocks that began last month after the credit markets lurched to a near standstill has now created worries that consumers will spend less after seeing the value of their retirement accounts and other investments drop.
"Markets abhor uncertainty and so we got a lot of that resolved this weekend and we got the reward Monday but now people are saying 'OK, now what is the economy going to do?'"
"We're definitely going to get a slowdown from the terror of going through that," Coffelt said.
According to preliminary calculations, a sell-off that intensified late in the session left Dow down 733.08, or 7.87 percent, at 8,577.91. On Monday, Sept. 29, the Dow had its largest point drop 777.68. Wednesday's percentage drop was the biggest since Oct. 26, 1987, which followed Black Monday, the Oct. 19 crash that sent the blue chips down 22.6 percent in a single session.
The Dow's massive decline Wednesday marks its 20th triple-digit move in 23 sessions.
Broader stock indicators also skidded. The Standard & Poor's 500 index fell 90.17, or 9.03 percent, to 907.84, and the Nasdaq composite index fell 150.68, or 8.47 percent, to 1,628.33.
With Wednesday's drop the resumed its string of triple-digit moves.
The stock market was trying to recover from last week's terrible run, which erased about $2.4 trillion in shareholder wealth and brought the Dow to its lowest level since April 2003. The tumble occurred amid a seize-up in lending stemming from a lack of trust among institutions in response to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc., which had been the nation's largest thrift.
The credit markets have been showing tentative signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.33 percent, up from 0.22 percent on Tuesday. Overall yields remain low, showing that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.98 percent from 4.03 percent late Tuesday.
Meanwhile, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4 percent in September, driven by lower energy costs. That decline matched analysts' expectations.
About 350 stocks advanced at the New York Stock Exchange, while about 2,800 declined. Volume came to 1.68 billion shares.
The Russell 2000 index of smaller companies fell 52.54, or 9.47 percent, to 502.11.
Light, sweet crude fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange.
In Asian trading, Hong Kong's Hang Seng Index lost nearly 5 percent after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1 percent after soaring 14 percent in the previous session.
In Europe, Britain's FTSE 100 fell 7.08 percent, Germany's DAX index fell 6.49 percent, and France's CAC-40 fell 6.82 percent.