NEW YORK – Wall Street hit levels not seen since 2003 on Wednesday, with the Dow Jones industrial average plunging below the 8,000 mark amid a dour economic outlook from the Federal Reserve and worries over the fate of Detroit's three automakers.
A cascade of selling occurred in the final minutes of the session as investors yanked money out of the market. For many, the real fear is that the recession might be even more protracted if Capitol Hill is unable to bail out the troubled auto industry.
Investors also scoured economic data that included minutes from the last meeting of the Federal Reserve in which policymakers lowered projections for economic activity this year and next. Economic worries caused across-the-board selling, with financial stocks particularly hard hit.
The S&P 500, widely considered the broadest snapshot of corporate America, slipped 52.54 points, or 6.12 percent, to 806.58; and the Dow gave up 427.47 points, or 5.07 percent, to 7,997.28. Both closed at their lowest levels since March 2003, and are rapidly approaching the lows of the 2000 to 2002 bear market.
The financial crisis has already wiped out $6.69 trillion of value from the S&P 500 since its October 2007 high, and many fear more is to come. Stocks have traded with high volatility in the past few months, with the major indexes soaring only to plunge an hour later as the market searches for a bottom.
"I don't know what the catalyst is going to be where we turn the corner and people start buying stocks wholeheartedly again," said Jon Biele, head of capital markets at Cowen & Co. "People got out of the way. The financial situation hasn't changed."
The selling on the New York Stock Exchange was staggering — only 158 companies that trade there finished the day positive while 2,943 declined. Volume again was light, a symptom of the market's recent volatility, with 1.63 billion shares exchanging hands by the close.
Other major indexes were also clobbered. The technology-heavy Nasdaq composite index fell 96.85 points, or 6.53 percent, to 1,386.42. The Russell 2000 index of smaller companies gave up 35.13, or 7.85 percent, to 412.38.
Investors were rattled on prospects that General Motors Corp., Ford Motor Co., and Chrysler LLC might not get a $25 billion rescue package before Congress quits for the year. The heads of those companies told lawmakers that time is running out, and that if one of them collapsed it would have a disastrous impact on the already battered economy.
Congressional Democrats have proposed using part of the $700 billion financial bailout package to pump into the ailing auto industry, but Republicans oppose such an approach. Treasury Secretary Henry Paulson has already shot down such an idea.
Senate Majority Leader Harry Reid of Nevada was hopeful of a deal in the "next day or two." He still hoped Paulson would step in if Congress can't usher through a deal.
Ford shares, which traded as high as $8.79 in the past year, plunged 42 cents, or 25 percent, to $1.26. GM, a stock worth $29.95 in the past 52-weeks, fell 30 cents, or 9.7 percent, to $2.79.
The testimony in Washington only heightened fears on New York trading floors that the current recession might significantly deepen.
"Finance people don't like theatrics," said Bernie McGinn, chief investment officer of McGinn Investment Management.
Investors were discouraged by the Federal Reserve's sharply lowered projection for economic activity this year and next.
In the minutes from its last rate-setting meeting in October released Wednesday, the Fed signaled additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century. The Fed predicts that, with the economy forecast to lose traction or maybe jolt into reverse, unemployment will move higher.
The uncertainty was evident after the government released two separate reports on consumer prices and new-home construction, more evidence that the economy remains in flux.
According to the Labor Department's Consumer Price Index, consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount. While lower prices might be good for the consumer, they can hurt corporate profits. Lower prices also raise the threat of deflation, a prolonged bout of falling prices.
Meanwhile, a government report on the housing sector showed that the industry's severe correction continues. The Commerce Department reported that construction of new homes plunged 4.5 percent last month to the lowest level on government records.
Many economists believe the economy has fallen into a recession that could be the worst downturn in more than two decades. The expectation is that easing inflation pressures will give the Federal Reserve room to cut interest rates further, but that gave little solace to investors.
Stocks have been trading erratically for several weeks as the market tries to gauge the direction of the economy. Analysts expect the volatility to continue.
There has been relentless selling since Election Day, driving the S&P 500 down about 20 percent. For the year, the Dow is now down 39.71 percent, while the S&P has fallen 45.07 percent, and the Nasdaq is down 47.7 percent.
Some analysts believe the steep losses on Wednesday set the market up for a potential rally. Stock future prices late Wednesday indicated a more stable open to the market on Thursday.
"I wouldn't be surprised if we had a rally by the end of the week," McGinn said. "From a long-term perspective I'd think you'd rather want to be a buyer down here than a seller."
Still, any rally is likely to be fleeting as the market works its way out of bear territory.
Volatility in the stock market has kept demand for Treasury bonds high. The yield on the benchmark 10-year Treasury note fell to 3.32 percent from 3.53 percent on Tuesday.
The stock market's big drop also influenced oil prices. Light, sweet crude fell 77 cents to settle at $53.62 a barrel on the New York Mercantile Exchange, about where prices were in January of 2007.
Consolidated volumed on the New York Stock Exchange came to 6.44 billion shares up from 5.4 billion on Tuesday.
In Asian trading, Japan's Nikkei index fell 0.66 percent, and Hong Kong's Hang Seng Index fell 0.77 percent. In European trading, Britain's FTSE 100 fell 4.82 percent, Germany's DAX index fell 4.92 percent, and France's CAC-40 fell 4.03 percent.