NEW YORK - Volatility battered Wall Street again Wednesday after a disappointing retail sales report reminded investors that the country is either in a recession or moving toward one. The Dow Jones industrials dropped nearly 400 points, giving back a chunk of their huge 936-point advance from Monday, and all of the major indexes were down at least 3 percent.
The government's report that retail sales plunged in September by 1.2 percent — almost double the 0.7 percent drop analysts expected — made it clear that consumers are unlikely to reach for their wallets in the coming months as they worry about a shaky economy.
The Commerce Department report is sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading comes as Wall Street is beginning to refocus its attention on the faltering economy following stepped up government efforts to revive the stagnant credit markets.
"Even though the banking sector may be returning to normal, the economy still isn't. The economy continues to face a host of other problems," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "We're in for a tough ride."
Analysts have warned that the market will see continued volatility as it tries to recover from the devastating losses of the last month, including the nearly 2,400-point plunge in the Dow over eight sessions. Such turbulence is typical after a huge decline, but the market's uneasiness about the economy will also be reflected in the gyrations expected in the weeks and months ahead.
Doubts about the economy were already surfacing in Tuesday's session, when investors halted an early rally and began collecting profits from stocks' big Monday advance. Wednesday's data confirmed the market's fears that the economy is likely to remain weak for some time, and that corporate profits are likely to suffer.
Mark Coffelt, portfolio manager at Empiric Funds in Austin, Texas, said moves by European and U.S. government officials to begin investing directly in banks are easing worries about credit. But the steep pullback in stocks that began last month after the credit markets lurched to a near standstill has now created worries that consumers will spend less after seeing the value of their retirement accounts and other investments drop.
"Markets abhor uncertainty and so we got a lot of that resolved this weekend and we got the reward Monday but now people are saying 'OK, now what is the economy going to do?'"
"We're definitely going to get a slowdown from the terror of going through that," Coffelt said.
Investors were digesting the first wave of third-quarter earnings reports, including those of two banks caught up in the mortgage mess. JPMorgan Chase & Co. reported an 84 percent decline in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.
JPMorgan, which bought the assets of failed bank Washington Mutual Inc. late last month as a result of the mortgage bust, said the profit drop reflected losses on bad mortgage investments, leveraged loans and home loans. The quarter's performance beat expectations, however.
Wells Fargo & Co., meanwhile, reported that its third-quarter profit fell 23 percent after it took hits on investments in troubled finance companies and increased its credit reserves. Still, results topped expectations. Wells Fargo is in the process of acquiring stricken Wachovia Corp.; Wells Fargo and JPMorgan, despite their own troubles, are regarded as among the nation's strongest banks.
In midday trading, the Dow Jones industrial average fell 387.49, or 4.16 percent, to 8,923.50 after dropping as much as 402 points.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 49.24, or 4.93 percent, to 948.77, and the Nasdaq composite index fell 69.33, or 3.90 percent, to 1,709.68.