Market Recedes on Recession Talk

Traders deal with new signs that the domestic economy is recessionary. Former Fed Chariman Paul Volcker's 'mother of all crises' comments weigh heavy. Frank Curzio reviews the action in The Real Story (above).
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Updated from 4:10 p.m. EDT

Stocks in New York took a slide Wednesday as traders dealt with new signals that the U.S. could be approaching a recession, if it isn't already in one.

The

Dow Jones Industrial Average

began the day with a brief uptick but spent the remainder of the day in negative territory, swinging in a range of around 150 points. Ultimately the index closed off 49.18 points, or 0.4%, at 12,527.26. The

S&P 500

gave back 11.05 points, or 0.8%, to 1354.49, and the

Nasdaq Composite

tumbled 26.64 points, or 1.1%, to 2322.12.

Georges Yared, chief investment strategist with Yared Investment Research, commented that given today's deluge of bad news, the market is "still kind of holding." Noting that today is the sixth consecutive day that the Dow moved less than 100 points in either direction, he said: "We may have found that bottom and are just kind of bouncing around that bottom without any great downward trajectory."

Paul Mendelsohn, chief investment strategist with Windham Financial, allowed, "we're not doing that badly under the circumstances." He noted, however, that rising energy shares and a significant climb at

Boeing

(BA) - Get Report

-- by far today's best-performing Dow component -- are leavening the pain and could be skewing the surface numbers.

Overall, breadth was poor. Roughly 3.48 billion shares changed hands on the

New York Stock Exchange

, and some 1.92 billion traded on the Nasdaq, as decliners topped advancers 7 to 3.

The action came as a series of events suggested the domestic economy is in fact in a recession or will be soon. Former

Federal Reserve

chief Alan Greenspan said Tuesday that he believes a recession has arrived, an opinion that came as the minutes from the central bank's latest meeting revealed many officials are indeed worried about the

bleak economic conditions

.

Also on Tuesday, Paul Volcker -- who immediately preceded Greenspan as Fed chief -- offered even more ominous comments on the state of the U.S. economy, calling the present situation "the mother of all crises" in a speech at the Economic Club of New York.

"What has plainly been at risk," Volcker continued, "has been a disorderly unraveling of the neutral trust among respected market participants upon which any strong and efficient financial system must rest. Simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace."

At the same time, a new

Bloomberg

survey found that economists are predicting U.S. growth will stall in the first half of the year amid a slowdown in consumer spending. Most respondents believe the U.S. is currently in, or headed for, a recession.

Mendelsohn, for his part, intoned, "I think there's no question we're in a recession. The only issue is duration and severity."

Further, billionaire investor George Soros echoed this week's gloomy assessment of the global economy by the International Monetary Fund, commenting that losses from the subprime debacle could indeed reach $1 trillion and even rise above that level, according to

Reuters

.

Lending further credence to the slowdown argument was

UPS

(UPS) - Get Report

, which shed 3.7% after the shipping-services company

cut back its first-quarter profit guidance

.

UPS and fellow package-delivery firm

FedEx

(FDX) - Get Report

are often treated as good indicators for the health of the economy because they tend to be busy during boom times and less so in contractions. FedEx shares were falling 3.1%.

But as the market heads into earnings season, said Yared, investors will probably forgive companies for what promises to be a miserable first quarter if they can project better things to come. "I think investors are going to be looking for more body language and more tone and tenor, if you will, on how companies are seeing their outlooks, versus results of the March quarter itself," he said.

Mendelsohn agreed that investors will be paying more attention to guidance than they will to earnings. "But you've got to believe, with what's going on, that there'll be more downward than upward guidance," he said. "Whether the Fed's interest-rate cuts can come to the rescue fast enough remains to be seen."

Meanwhile,

The Wall Street Journal

reported that the Fed is exploring backup plans in case its recent credit-market remedies don't work. Possible options include having the Treasury borrow beyond its needs for government funding, among other things.

As investors headed away from equities, Treasury prices jumped. The 10-year note moved up 20/32 in price to yield 3.48% and the 30-year bond surged a full point in price, yielding 4.32%.

Also, crude oil hit a new intraday record of $112.21 a barrel before easing to $110.87 -- a gain of $2.37 -- as gas prices at the pump touched an all-time high of $3.343 a gallon. The surge in crude came after the Energy Information Administration reported crude stockpiles sliding by 3.2 million barrels last week.

"That was about as bearish as reports get," said James Williams, an economist with energy-research firm WTRG Economics, noting that total petroleum inventory dropped by nearly 9 million barrels last week when taking into account crude, gasoline and distillate fuels. He also noted the oil industry is at about 85% utilization, which tends to make for higher prices.

Still, Williams called demand "anemic," with petroleum consumption having dropped by about 2% across the board since the beginning of the year. "At some point, folks are going to start to look at the map. When that is, I'm not sure," he said. "There's too much hot money in the crude-oil futures market."

Gold futures climbed $19.50 to $937.50 an ounce. The dollar erased early gains, recently weakening by 0.9% against both the euro and the yen.

Back on the corporate front,

Citigroup

(C) - Get Report

is reportedly close to disposing of $12 billion in risky leveraged loans, with the banking giant nearing a deal to sell them at a discount to private-equity firms. Citi shares slipped 0.8% at $23.58.

Moody's upgraded

Washington Mutual

(WM) - Get Report

to stable from negative on the heels of news that it would be getting $7 billion from TPG and other investors. While the bank was hammering out that deal, it reportedly received -- and rejected -- a takeout bid from

JPMorgan Chase

(JPM) - Get Report

for as much as $8 a share. WaMu shares gave up 3.1% to $11.45.

Merrill Lynch

(MER)

, meanwhile, lost 1.7% after

CNBC

reported that the investment bank will probably write down between $6 billion and $6.5 billion in bad assets for the first quarter.

Away from financials, Boeing announced that production delays on its 787 Dreamliner aircraft have prompted it to

slash its target

for 2009 deliveries of the plane from 109 to 25, as well as push back the plane's debut flight to the fourth quarter. Still, shares were up 4.8%.

But

AMR

(AMR)

, the parent company of American Airlines, slid 11.1% after the airliner canceled more than 1,000 flights today, on top of the hundreds of flights it grounded yesterday, in order to complete inspections of its MD-80 fleet. The company noted that the inspections are not related to flight safety.

Electronics retailer

Circuit City

(CC) - Get Report

posted a surprise fiscal fourth-quarter profit of $4.9 million, reversing a year-ago loss. Still, after some early upside action, shares surrendered 1.8%.

Elsewhere,

Legg Mason

(LM) - Get Report

mutual fund manager Bill Miller told the

Journal

that, should

Microsoft

(MSFT) - Get Report

lower its takeout bid for

Yahoo!

(YHOO)

, his firm -- one of Yahoo!'s biggest shareholders -- is prepared to back efforts by the Internet-portal operator to stay independent. Earlier this week, Microsoft implied it would knock down its offer for Yahoo!, giving the latter three weeks to accept its current bid before going hostile.

Shortly before market close, moreover, reports emerged that Yahoo! is still actively pursuing "strategic alternatives" to accepting Microsoft's proposal as it negotiates a partnership with

Google

(GOOG) - Get Report

. Yahoo! confirmed the reports after the close, announcing that it will begin a "limited test" of Google's AdSense, "which will deliver relevant Google ads alongside Yahoo!'s own search results."

Yahoo! finished up 7 cents at $27.77, and Microsoft rose 0.5%. Google shares shed 0.8%.

The major overseas markets were losing ground. In Asia, Tokyo's Nikkei 225 lost 1.1%, and Hong Kong's Hang Seng gave up 1.4%. In Europe, the FTSE 100 in London ticked down 0.1% as Germany's Xetra Dax and the Paris Cac sank 0.8% apiece.