Wall Street plunges 360 points

Wall Street plunged today, pulling the Dow Jones industrial average down more than 360 points as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing US economy.

After a warning yesterday from the Federal Reserve about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking.

The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil’s ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerated.

Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the US grew in October at the weakest pace since March.

The combination of factors led investors to pull back sharply from Wednesday’s rally, in which the Dow climbed 137 points after the Fed said the economy had weathered the summer’s credit crisis.

“Wall Street is in love with the idea of a rate cut, and realised that the Fed said inflation is still a concern – that lowered the chances of a cut in December,” said Ryan Detrick, a senior technical strategist with Schaeffer’s Investment Research. “We’re now feeling the pain now that investors have slept on it, and figured out what they said.”

Christopher Cordaro, chief investment officer at RegentAtlantic Capital, said Wall Street remained anxious about the possibility of recession. He also believes the market is devoid of enough positive news “to have any type of sustained rally”.

Investors were unmoved when the Fed pumped 41 billion into the US financial system, one of its largest cash infusions since the credit crisis began in the summer. This increases the amount of money banks have to lend, and helps improve liquidity. In the past, such an action helped soothe the market, but that was not the case today.

With the market growing pessimistic about the economy, the Labour Department’s report on October jobs creation, scheduled to be released tomorrow morning, will be taking on even more importance than it usually has. The data is expected to show unemployment remained steady in October, with payroll growth of 85,000 new jobs, compared with 110,000 in September.

The Dow fell 362.14, or 2.60%, to 13,567.87.

The Standard & Poor’s 500 index was off 40.94, or 2.64%, at 1,508.44, while the Nasdaq composite index dropped 64.29, or 2.25%, to 2,794.83.

Big late-session moves became common on Wall Street during the summer. Investors remain hopeful that a down market will turn around, but tend to launch a late afternoon selloff if that does not happen.

“We’ve been getting all these mixed signals, and this is just a confluence of bad news between the Fed, the financials, and this mixed earnings season,” said Chris Johnson, president of Johnson Research Group.

Financial stocks were pummelled after Citigroup and Bank of America, the two biggest US banks, were downgraded by CIBC World Markets on worries about the credit markets.

Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note dropped to 4.34% from 4.47% on Wednesday.

Crude prices vaulted above 96 per barrel in overnight trading. A barrel of light sweet crude settled down 1.04 at 93.49 on the New York Mercantile Exchange.

The Commerce Department’s report that consumer spending rose by 0.3% in September, slightly lower than the 0.4% increase that analysts expected, raised concerns about a slowing economy.

In addition, the performance of the manufacturing sector in October suggested ongoing troubles in the housing and credit markets have seeped into the industrial sector.

The Institute for Supply Management, a US trade group, reported its manufacturing index registered 50.9, down from 52.0 in September and below expectations for 51.8. A reading above 50 indicates growth; below that spells contraction.

Also today, the Labour Department said the number of people filing for unemployment benefits declined by a larger-than-expected 6,000 last week to total 327,000.

Wall Street was also troubled by the day’s corporate news. Exxon Mobil, the world’s largest publicly traded oil company, reported third-quarter profit fell 10% because of lower refining and chemical margins. Shares of the Dow component dropped 3.49, or 3.8% to 88.50.

Bank of America, the No 2 US bank, dropped 2.57, or 5.3%, to 45.71. Citigroup, the US’s largest financial institution, dropped 2.85, or 6.9% to 38.51 – its lowest level in four years.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume totalled 970.8 million shares.

The Russell 2000 index of smaller companies was down 32.84, or 3.97%, at 795.18.