US stocks stumble as investors fear worsening economy

Stocks slumped for a second straight day today as investors, already on edge about the worsening economy, were further rattled by a report that Washington’s plans to help banks may have hit a snag.

Stocks slumped for a second straight day today as investors, already on edge about the worsening economy, were further rattled by a report that Washington’s plans to help banks may have hit a snag.

The Dow Jones industrials declined 4.5% over two sessions; broader stock indexes are down more than 5% since Wednesday.

Uncertainty about when the economy will improve has investors looking to Washington for answers. With the market particularly worried about the prospects of a big bank failure, investors have been hopeful that the government will soon release details of a wide-reaching plan to help banks rid themselves of their toxic assets. But a CNBC report late today cast doubt on the so-called ’bad bank’ idea, citing an unnamed industry source as saying the plan has hit significant snags. The news sent stocks down sharply lower in late afternoon trading.

“People were hoping it was coming sooner rather than later,” said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and the Burnham Financial Services Fund. “So many people were anticipating good announcements about the bad bank over the weekend, but now not expecting any good news.”

Treasury Secretary Timothy Geithner was meeting Friday with top government officials to develop the administration’s plan for overhauling the USD700 billion bailout programme and improve regulation of the financial system.

Earlier in the day, investors found little solace in a milder-than-expected report on fourth-quarter economic activity. In fact, the report only heightened concerns that the economy is worsening.

Gross domestic product, the widely followed measure of the economy, shrank at a 3.8% pace in the final three months of 2008, the Commerce Department reported. That compared with a 0.5% decline the previous quarter.

Today’s reading was much better than the 5.4% drop economists expected. But many analysts suspect the economy is shrinking at an even faster pace in the first quarter. Weak earnings reports and rising job losses are helping to solidify that belief.

“We expected fourth quarter to be the worst of the recession,” said Randy Frederick, director of trading and derivatives at Charles Schwab. “From an investor’s perspective, they may see this stronger-than-expected report setting us up for the first quarter to be worse.

“Each time you get a report that indicates that maybe we hadn’t bottomed out yet, it prolongs the recovery.”

According to preliminary calculations, the Dow Jones industrial average fell 148.15, or 1.82%, to 8,000.86. The Standard & Poor’s 500 index fell 19.26, or 2.28%, to 825.88, and the Nasdaq composite index fell 31.42, or 2.08%, to 1,476.42.

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