Dow sinks as bleak mood descends on markets

NEW YORK -- After rallying almost 20% off its low in a six-session run to the presidential election, the stock market has suffered a nasty two-day relapse. That has prompted fresh fears about whether stocks have really hit bottom and dashed much of the optimism following President-elect Barack Obama's historic win.

The back-to-back sell-offs equated to a 10% drop, the worst two-day slide since October 1987. Fresh signs of economic deterioration once again drove the selling. Weak October retail sales, bleak business outlooks from CEOs and more signs of job market distress reinforced fears that the business downturn will last longer and hurt the profitability of U.S. companies more than previously believed.

The Dow fell 443 points Thursday to 8696, bringing its two-day decline to 929 points, or 9.7%.

The market has shifted to a defensive mode again now that the election is over and focus has swung back to the worst credit crisis since the Great Depression. "It's back to reality," says Robert Barbera, chief economist at ITG. "If you look at the running commentary from Wednesday and Thursday, people have been selling shares of particular companies because the CEO or chief investment officer says business really stinks."

While it might not be surprising that forward-looking statements from companies are taking on a negative tone given the freezing up of credit, Wall Street analysts are aggressively adjusting their "arithmetic" to take into account the gloomy outlooks, Barbera says.

In a fresh sign of how jittery investors are, a surprise massive interest-rate cut of 1½ percentage points Thursday by the Bank of England seemed to spook investors in the short term, even though lower borrowing costs should help stimulate economic growth longer term, says Pat Adams, portfolio manager of Choice funds.

"Some investors said, 'Man, things must be bad for them to do that,' " Adams says.

Mark Arbeter, chief technical strategist at Standard & Poor's, says the market is likely to go back and test its October lows a third time. If this so-called "triple bottom" holds, it would mean the broad S&P 500 index would stop falling around 840 to 850, which is where it bottomed on Oct. 27 and is a 6% to 7% drop from here. Still, even if the market stays above that, "The bottoming pattern could take months, possibly a year," before the powerful downtrend is reversed for good, he says.