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Dow Dives 680 as Wall Street Learns It's Really a Recession

Mike Taylor

Stocks in New York suffered a merciless beatdown and closed with brutal losses Monday, as the National Bureau of Economic Research confirmed what many had suspected -- the U.S. has been in a recession for nearly a year. Monday's session was also marked by massive profit-taking after a five-day rally in the blue-chip indices, and without significant buying catalysts, stocks succumbed to selling pressure.

The Dow Jones Industrial Average plummeted 679.95 points, or 7.7%, to 8149.09, and the S&P 500 fell 80.03 points, or 8.9%, to 816.21. The Nasdaq sank 137.50, or 9%, to 1398.07.

All of the Dow's 30 stocks finished with losses, and its best performer, McDonald's (MCD Quote), lost 4.4%. Of the S&P 500's components, only two stocks -- Rohm & Haas (ROH Quote) and AutoNation (AN Quote) -- finished on the upside.

The NBER, which tasks itself with declaring the timing of business cycles, said the U.S. entered a recession in December 2007.

"That's good news in some ways," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "Nobody's going to think so, but I think so." The reason for Johnson's optimism, he said, is that the average recession lasts between 16 and 17 months. If the current downturn started nearly a year ago, then the economy should soon approach a recovery, he said.

However, Johnson said, there are many indications that the current recession will be longer than average. He said that gloomy leading indicators, along with a dim outlook for the housing market, point to a prolonged downturn. "The problem is, I can't make the case for the end," he said.

Other economic data released Monday were also bearish. The Census Bureau's October construction spending figures showed a 1.2% decline compared with flat spending for September.

The Institute for Supply Management's November manufacturing index registered at 36.2, a 26-year low. Economists were expecting a reading of 37.

"However you look at the numbers the message is the same; manufacturing is in freefall, with output collapsing. We see no prospect for near-term improvement," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. He said the survey is an indication that the recession will continue.

Speaking in Austin, Texas, Federal Reserve Chairman Ben Bernanke discussed the economic environment, leaving the option for an additional reduction in the fed funds rate on the table. The Fed's target interest rate currently rests at 1%.

Treasury Secretary Henry Paulson also spoke Monday, saying that his agency is coming up with additional plans to help stagnant credit markets and provide relief for the housing market.

Beyond the dim economic reports, investors had other incentives to sell. Monday's session offered occasion for investors to close the book on November, which was filled with wild market swings, including a five-day surge in the Dow and S&P that closed out the month.

"We've had a lot of very extreme and in some cases bizarre market movements," said Brian Gendreau, investment strategist at ING Investment Management. He said that much of the volatility has been due to hedge-fund redemptions. That process may be anywhere between half to three-quarters done, he said.

Gendreau said he had been hoping for a bounce in the major averages that follows a major selloff and additional support from the end of the presidential race. "Maybe we got it, but maybe that was it," he said of November's month-end rally.

Corporate headlines did little to counter selling pressure. Before trading began, beleaguered automaker General Motors (GM Quote) was ironing out a plan to cajole Congress into giving it federal money, according to a report by The Wall Street Journal. The report indicated that GM's board is willing to explore all restructuring options, including a Chapter 11 bankruptcy filing, if it can't secure government funds.

Over the weekend, another report by the Journal said that GM was exploring other plans to shore up its balance sheet, including offering its debt holders the opportunity to swap credit for equity. GM shares dropped 12% to $4.59.

As the carmakers faced dire circumstances, the United Auto Workers called for Congressional aid for the Big Three.

Ford (F Quote) said it was considering a possible sale of its Volvo brand. The move comes amid a decline in global auto demand and Ford's efforts to bolster its balance sheet, the company said. Shares slid 5.2% to $2.55.

Hoping to reach a bailout deal, the automakers are expected to present before Congress on Tuesday plans for revamped business models and improved long-term viability.

The Journal also reported that Delta Air Lines (DAL Quote) would scale back its orders for Boeing's (BA Quote) new 787 Dreamliner and instead add to its orders for the long-range 777-200LR.

Delta shed 9.7% to $7.96, and Boeing gave back 6.5% to $39.88.

In the financial sector, Citigroup (C Quote) bought a highway business from Spanish construction firm Sacyr Vallehermoso for $10 billion. Media reports also suggested Citi would sell its Japanese trust banking unit for $416.7 million. Citi, a Dow component, was the index's biggest loser, dropping 22% to $6.45.

Meanwhile, Morgan Stanley (MS Quote) may buy regional banks to expand its retail banking footprint after becoming a bank holding company in September, according to a Journal report. Shares sank 23% to $11.35.

AIG (AIG Quote) announced it was selling its Switzerland-based AIG Private Bank wealth management business to Abu Dhabi firm Aabar Investments. AIG lost 18% to $1.65.

Beyond the financial sector, Johnson & Johnson (JNJ Quote), said it would buy breast-implant maker Mentor (MNT Quote) for $1.07 billion. The stock edged down 5.6% to $55.33. Mentor soared 89% to $30.58.

Gendreau of ING said M&A activity had fallen off as capital and credit, which had supported deal brokering, became increasingly scarce this year. On the other hand, "With all of these extreme market movements, there have to be some mispricings."

Elsewhere, the caustic economic climate claimed chicken processor Pilgrim's Pride (PPC Quote), which filed for Chapter 11 bankruptcy protection Monday.

As to analyst actions, Occidental (OXY Quote) garnered an equal-weight rating at Morgan Stanley. Insurer Prudential (PRU Quote) was upgraded to buy from hold at Citigroup on valuation. Occidental dropped 15% to $45.89, and Prudential skidded 21% to $17.15.

Microsoft (MSFT Quote), meanwhile, suffered a reduced price target at Morgan Stanley. Shares dropped 8% to $18.61.

In the realm of commodities, crude oil for January delivery lost $5.15 to settle at $49.28 a barrel. On Saturday, OPEC said it will forgo new reductions in output but did not rule out a supply cutback going forward. Gold for February delivery closed down $42.20 at $776.80.

As investors fled stocks, longer-dated U.S. Treasury securities were rocketing in price. The 10-year note was gaining 1-16/32 to yield 2.75%, and the 30-year was up 4-11/32, yielding 3.23%. The dollar was rising vs. the euro and pound but falling against the yen.

Overseas, European exchanges such as the FTSE in London and the DAX in Frankfurt were trading lower. In Asia, Japan's Nikkei closed with losses, while Hong Kong's Hang Seng ended on the upside.