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."
The credit markets have been showing tentative signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.33%, up from 0.22% on Tuesday. Overall yields remain low, showing that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.98% from 4.03% late Tuesday.
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, 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 also digesting the first wave of third-quarter earnings reports, including those of two banks caught up in the mortgage mess. JPMorgan Chase reported an 84% decline in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.
JPMorgan, which bought the assets of Washington Mutual 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, meanwhile, reported that its third-quarter profit fell 23% 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 among the nation's strongest banks.
In other economic data Wednesday, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4% in September, driven by lower energy costs. That decline matched analysts' expectations.
Light, sweet crude fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange.
In Asian trading, Hong Kong's Hang Seng Index lost nearly 5% after rising more than 13% the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1% after soaring 14% in the previous session.
In Europe, Britain's FTSE 100 fell 7.08%, Germany's DAX index fell 6.49%, and France's CAC-40 fell 6.82%.
Contributing: Matt Krantz