Dow Jones Industrial Average Closes Down More Than 500 Points

VIDEO: Stock market has erased all of its 2011 gains in the last two weeks of trading.
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U.S. stock markets tumbled today amid fears of a weakening U.S. economy. The Dow Jones Industrial Average closed down more than 500 points, the biggest one day drop since December 2008. The volatility index (VIX) was up 26 percent.

At close, the Dow was off 512.76 points, or 4.31 percent, to 11,383.68, the Standard & Poor's 500-stock index was down 60.27 points, or 4.78 percent, to 1,200.07. The Nasdaq was down 136.68, or 5.08 percent, to 2,556.39.

Fears of a double dip recession are clearly taking hold among traders and economists.

"The market is sending a strong and clear message that the U.S. economy is in a soft patch, the question is whether the soft patch is temporary, or something more serious," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC. "There's a loss of confidence in the economy and there's a real question as to whether the Federal Reserve or the Federal government in Washington (will ) do anything about it. We need more than one number, we need a series of numbers showing the economy is starting to recover. We don't see that yet."

Markets reacted in particular to weekly jobless claim data from the Labor Department that shows the job market remains weak. In the week ending July 30, there were 400,000 new unemployment claims. This was a decrease in initial claims from the week earlier, but clearly not enough of a decrease to give investors confidence in the strength of the U.S. economy as whole.

All eyes will now be on the official U.S. jobs report for July out Friday morning. A better than expected number may move markets higher, but a worse than expected number may wreak yet more havoc on already battered markets.

Fear about a spreading debt crisis in Europe also contributed to the sharp market decline today. Last week's dismal GDP data and weak manufacturing data earlier this week were also among the factors inciting investors' worries.

"Though you have good earnings, institutions have to put higher on the list of priorities the sense that there are drivers of fear out there in the global markets that trump earnings," said Peter Kenny, Managing Director of Knight Capital Group.

The cost of a barrel of oil also dropped significantly today, falling more than $5 in New York trading as investors start pricing in the increasing chance of a recession. The contract settled at $86.63, the lowest price since February, down $5.30 or 5.7 percent in a single day.

As futures prices fall, American consumers will likely start to see the gas prices at the pump (averaging $3.71 nationally for regular unleaded now) drop in the coming weeks.

On Tuesday, the Senate passed an agreement to raise the debt ceiling and avoid a default on U.S. debt, following passage in the House on Monday evening.

"The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa," Moody's stated in a report.

Moody's assigned a negative outlook to its rating, saying it could downgrade the U.S. if fiscal discipline weakens in the coming year, further "fiscal consolidation" does not take place in 2013, the economic outlook "deteriorates significantly," or there is an appreciable rise in the government's spending "over and above what is currently expected."

Fitch Ratings confirmed its AAA rating for United States debt over the short-term, but warned of more tough choices coming soon.

"While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic back drop if the budget deficit and government debt is to be cut to safer levels over the medium term," Fitch said in a statement.

On Tuesday, U.S. financial markets were first buoyed by the news of the possible debt limit deal in Washington, but slid after the Institute for Supply Management (ISM) issued its monthly index, showing a tepid manufacturing sector.

"Consumers and businesses really need to regain some confidence and start to spend more if we're going to have a resurrection in the third quarter," Bruce McCain, chief investment strategist with Key Private Bank, said.

Economists consider the ISM index an important indicator in predicting the manufacturing portion of the economy, said Phil Orlando, chief equity strategist with Federated Investors.

"The ISM number was a game changer because we thought the economy would start to firm in the later summer months, especially as Japan starts to come back," Orlando said.

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