Dow closes down 3.5%: Stocks slide on global fears

— -- Rising fear that the world might be headed toward a global economic slowdown prompted investors to hit the sell button Thursday and knock the Dow Jones industrial average down nearly 400 points.

The Dow sank 391.01 points, or 3.5%, falling below the 11,000 mark to 10,733.83, as investors digested the Federal Reserve's action Wednesday to sell $400 billion in short-term Treasuries while buying longer-term Treasuries for the same amount. Investors fretted over the wording of the Fed's statement that indicated the U.S. economy still faced "significant" risks.

Disappointing economic reports from China and Germany, thought to be the last bastions of economic strength, made things even worse.

"Greed is long gone. Fear is clearly taking over," says Dan Seiver, professor of finance at San Diego State University.

Investors slammed commodities, too, on the fear that demand for industrial materials for production would wane. Crude oil prices fell $4.98 a barrel to $80.96 and gold, silver and industrial metals all sold off. Gold fell 4% to $1,734 an ounce and silver plummeted 11.5% to $35.83 an ounce.

For U.S. stocks pain was felt across the board, but banks were especially hit hard. Bank of America tumbled 5%, or 32 cents, to $6.06 and Citigroup lost 6.1%, or $1.56, to $23.96. The SPDR Select Sector Financial exchange-traded fund, which fell 2.9%. FedEx fell $5.92, or 8.2%, to $66.58, after the delivery firm cut its 2012 forecast 1.5%.

Investors are underwhelmed by the size of the Fed's "Operation Twist" maneuver announced Wednesday and see it as too little to help spur "the economy which is clearly staggering on the brink of a potential downturn," Seiver says.

Investors, too, have little faith that the Fed's latest move will be any more effective than its previous ones, says Michael Farr of Farr Miller & Washington. "It's clear we have a long and difficult process of recovery ahead and any hopes of a V-shaped recovery should be put to rest," he says.

Meanwhile, the fact that Europe has not made any solid progress in resolving its debt mess is only heightening concerns of a global economic slowdown, he says.

Political indecision both in the U.S. and in Europe is only making a difficult economic situation worse by introducing major uncertainty, says Doug Cote, strategist at ING Investment Management. He says politicians "on both sides of the Atlantic will have to look into the abyss of the markets before they act, but they will act," he says. "Two things drive markets: Fundamentals and global risk," he says. "Global risk is now running the markets."

While investors are growing more pessimistic, a key element for the markets to bottom, negativity toward stocks is not close to where it was when the market bottomed in 2008, says Todd Salamone of Schaeffer's Investment Research. "We're not there yet," he says. "The shorts (investors betting against the market) are not being squeezed …. and buyers don't think they're missing out on anything yet."

Investors are coming to the realization that one factor holding up stocks, expectations for solid corporate earnings growth for 2012, might be the latest to weaken, says Sam Turner of Riverfront Investment Group. He expects analysts to continue to cut their profit forecasts for 2012, which could cause stocks to fall another 5% before buyers are lured in, he says.

"Valuations have not quite discounted the fears of a recession. Whether we have one (a recession) or not, we'll price one in," he says.