Wall Street sold off sharply Monday as concerns about a weakening credit market wiped out investors' enthusiasm about strong retails sales over the holiday weekend. The Dow Jones industrial average fell nearly 240 points.
The Dow's decline from its mid-October closing high is now 10.03 percent, putting the blue chip index past the 10 percent threshold that signifies a correction.
The swoon comes as investors were unnerved by another series of announcements that pointed to continuing problems in the credit markets, the result of home loan debt going bad under the weight of a faltering housing market.
Two banks had bad news: Citigroup Inc. warned it is looking to cut costs — raising the possibility of further job cuts — and HSBC Holdings PLC said it plans to bail out two funds it manages. To do so, Europe's largest bank plans to move about $45 billion of the fund's assets onto its balance sheet.
Comments from Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, about the exposure that the Atlanta-based Federal Home Loan Bank might have to Countrywide Financial Corp.'s debt stirred concerns about further weakening in the banking sector.
Meanwhile, The New York Federal Reserve, acknowledging "heightened pressures" in money markets that are expected to last through the rest of the year, said it plans to conduct a series of repurchase agreements aimed at boosting liquidity in the credit markets. The announcement from the New York Fed, which carries out monetary policy set by the U.S. Federal Reserve, essentially puts in writing many of the steps the Fed often takes at this time of year.
The Fed said it would inject $8 billion into the banking system on Wednesday. The amount of money is somewhat larger than in past years at this time.
A better-than-expected report on retail sales wasn't able to hold the market's early gains. Retail sales on Friday and Saturday combined rose 7.2 percent to $16.4 billion from the same two-day period a year ago, according to ShopperTrak, which tracks total sales at more than 50,000 U.S. retail outlets. That's helped ease investor concerns about consumer spending, which accounts for two-thirds of all economic activity.
"The early focus was on the consumer and the weekend sales but of course subprime always seems to pop its head up," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc., referring to loans made to borrowers with poor credit. Some of these loans are now souring, forcing banks to write off huge sums.
The Dow fell 237.44, or 1.83 percent, to 12,743.44, closing at the lows of the session. It peaked at 14,198.10 in mid-October.
Broader stock indicators also gave up ground. The Standard & Poor's 500 index declined 33.48, or 2.32 percent, to 1,407.22, and the Nasdaq composite index fell 55.61, or 2.14 percent, to 2,540.99.
The S&P 500's decline Monday leaves it down 0.78 percent for the year. Many investments such as mutual funds mirror or are measured against the index.
Government bond prices rose as stocks declined. The yield on the 10-year Treasury note, which moves opposite its price, fell to 3.85 percent from 4 percent late Friday.
Illustrating investors' unease, the Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped nearly 13 percent Wednesday.
Energy prices fell. A barrel of light, sweet crude fell 48 cents to settle at $97.70 a barrel on the New York Mercantile Exchange, after briefly crossing $99 overnight.
Gold prices rose, while the dollar fell against other major currencies.
The Fed's decision to inject liquidity into the market isn't unusual for this time of year. Last year, the Fed added a net $21.9 billion into the system from the Monday following Thanksgiving until the first week of January.
Lee Adler, publisher of The Wall Street Examiner, said the overall level of recent liquidity injections is consistent with past years.
"I think it's a confidence game here," Adler said. "The markets are obviously having liquidity problems. The Fed wants people to think that they're doing something about it."
He noted that Monday's announcement differs from past practices in that the bank is making a formal statement of its policy. Ultimately, though, the Fed is still doing what it always does, he said.
Concerns about banking dominated the session. Schumer's remarks followed a Wall Street Journal report about Countrywide's reliance on loans from the FHLB. He called overseers of the federally supported bank network to examine the risk of the collateral Countrywide has put up for the loans.
Countrywide, the nation's largest mortgage lender, fell $1.01, or 10.5 percent, to $8.64.
Among other financial stocks, Citigroup fell $1, or 3.2 percent, to $30.70, while Lehman Brothers Holdings Inc. fell $3.40, or 5.6 percent, to $57.46.
Also weighing on the market, Citigroup reduced its outlook on several major homebuilders, saying a glut of inventory and coming resets of subprime mortgages will continue to weigh on the sector at least through the second quarter of 2008.
Homebuilder Lennar Corp. fell $1.09, or 7 percent, to $14.50, while KB Home fell $2.04, or 9.4 percent, to $19.65.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where consolidated volume came to 3.63 billion shares.
The Russell 2000 index of smaller companies fell 19.96, or 2.64 percent, to 735.07.
Overseas, Britain's FTSE 100 fell 1.30 percent, Germany's DAX index lost 0.55 percent and France's CAC-40 dipped 1.14 percent. In Asia, Japan's Nikkei stock average closed up 1.66 percent, Hong Kong's Hang Seng index gained 4.09 percent.