Just when investors started feeling better about the financial system, rising fears about the economy sent stocks tumbling again Wednesday.
The Dow Jones industrials dropped more than 700 points — losing much of their 936-point advance from Monday — and all the major indexes fell at least 7%.
Investors were skittish after two disheartening reports convinced Wall Street that a recession, if not already here, is inevitable.
The Dow fell 733.08, or 7.87%, to 8,577.91. The Dow's massive decline Wednesday marks its 20th triple-digit move in 23 sessions.
Broader stock indicators also skidded. The Standard & Poor's 500 index fell 90.17, or 9.03%, to 907.84, and the Nasdaq composite index fell 150.68, or 8.4%, to 1,628.33.
The government's report that retail sales plunged in September 1.2% — almost double the 0.7% drop analysts expected — made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market.
The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy following stepped up government efforts to revive the stagnant credit markets.
The release of the beige book, the assessment of business conditions from the Federal Reserve, added to investors' angst. The report found that the economy continued to slow in the early fall as financial and credit problems took a turn for the worse. The central bank's report supported the market's belief that difficulties in obtaining loans have choked growth in wide swaths of the economy.
"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."
Fed Chairman Ben Bernanke offered a similar opinion, warning in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.
"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," he told the Economic Club of New York.
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 anxiety about the economy is also expected to cause gyrations in the weeks and months ahead.
Investors apparently have come to believe that Monday's big rebound, a response to the government's plan to invest $250 billion in banks to get the lending business restarted, was overdone given the problems elsewhere in the economy.
"It really doesn't come as a shock after Monday's gains were I think a little bit excessive," said Charles Norton, principal and portfolio manager at GNICapital, referring to the market's pullback.
He contends that the government has taken so many steps that investors must now wait for some of the actions to help steady the economy.
"It seems like all the tools in the tool chest have mostly been used now and now it's back to reality," he said. "We're still faced with the fact that the economy is slowing and earnings aren't very good."