Stocks tumble as investors worry about consumers

Major US stocks indexes tumbled by the biggest amount in six weeks today as investors grew worried that they have been too quick to bet on an economic rebound during the market’s five-month rally.

Overseas markets plunged and investors’ demand for safe-haven investments sent the dollar and Treasury prices shooting higher.

The Dow Jones industrial average skidded 186 points and the major indexes fell at least 2%. The Nasdaq composite index was hardest hit, falling 2.8%, but it also had he biggest advance as Wall Street rallied this year.

A shudder in China’s main stock market touched off a wave of selling that spread to Europe and then the US.

A drop in quarterly profits at home improvement retailer Lowe’s Cos. added to worries that an improvement in the economy is far off.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the selling was warranted.

“The economics obviously don’t support where we’ve been,” he said.

The slide on Wall Street was steep but felt more controlled than the plunges of the past year because stocks ended just off of their worst levels and because analysts have been calling for a retreat after the Dow and Standard & Poor’s 500 index raced up 15% in only five weeks.

The Shanghai stock market tumbled 5.8% on Monday as investors worried that stocks had risen too quickly and that the Chinese government would tighten bank lending policies. Investors outside China have been hoping that strengthening there would spill over to other economies.

Worries grew when Lowe’s said consumers are putting off big purchases. That’s troubling because consumer spending accounts for more than two-thirds of US economic activity.

Some investors used to seeing a quick bounce-back in stocks have underestimated how difficult the recovery could be, even though many analysts have warned that it could take well into 2010 for the economy to regain strength. And some seem to be in the same trading mind-set as three years ago, willing to bid stocks up even when there was little economic or corporate evidence to justify a huge advance.

Now, with consumers facing high unemployment, weak home prices and mounds of debt, investors are worrying that they had grown too optimistic even though the stock market tends to improve before the economy looks good after a recession.

Quincy Krosby, market strategist for Prudential Financial, said investors are often divided at turning points in the economy because not all signs will point to recovery at once.

“The market and the data have been like a Rorschach test,” she said.

The fears about China’s recovery and consumers are contrasting with more upbeat signals, like an unexpected drop in the nation’s unemployment rate last month.

Krosby said with the earnings reports that drove stocks in the past month have largely been factored in and now investors are finding little to convince them the economy is improving.

According to preliminary calculations, the Dow fell 186.06, or 2 %, to 9,135.34. The Dow had been down almost 205 points at its low of the day.

The broader S&P 500 index fell 24.36, or 2.4%, to 979.73, while the Nasdaq fell 54.68, or 2.8%, to 1,930.84.

It was the biggest drop for major stock indexes since July 2, when a weak employment report fanned worries about the economy and pushed stocks down more than 2.5%.