The Wall Street Journal-20080206-A 370-03-Point Vote Against Stocks- Investors- Recession Concerns Flare Anew- Sparking a Treasury Rally- Rate-Cut Hopes- The Nasdaq Composite Smells a -Bear- Again

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A 370.03-Point Vote Against Stocks; Investors' Recession Concerns Flare Anew, Sparking a Treasury Rally, Rate-Cut Hopes; The Nasdaq Composite Smells a 'Bear' Again

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Recession fears flared anew on Wall Street, burning away much of the recent rally in stocks.

The Institute for Supply Management's report of a steep and unexpected decline in service-sector activity in January sparked the selloff, causing traders to ratchet back expectations for economic growth and corporate profits.

The Dow Jones Industrial Average tumbled 370.03, or 2.9%, to 12265.13. It was the worst one-day percentage loss for the blue-chip average since Feb. 27, 2007, leaving it down 7.5% so far this year and 13.4% off its record close in October.

Treasury-bond prices rallied as investors sought out havens.

"The weak ISM number, coupled with the weak jobs number last week, is making investors nervous that we are in a recession," said Jim Herrick, director of equity trading at Robert W. Baird in Milwaukee.

The Dow has fallen 3.75% in two days, its steepest back-to-back drop since July and erasing more than half the ground it had gained since the recent bottom in late January. The rush to the exits may have political implications, coming as millions of Americans voted in primaries and caucuses throughout the country.

As they have for the past several months, financial stocks set the pace. Citigroup was the Dow's worst performer, sinking more than 7.4%. The Dow Jones Wilshire Financials index tumbled 3.9% yesterday and has fallen 6% in the past two days. The index had rallied 12.8% since late January, amid hopes the worst was over for the battered sector.

No such luck, as news of tightening credit conditions and slower economic growth stoked worries that the more than $100 billion in credit-related write-downs the sector has taken in recent months is only the beginning. Late in the session Fitch Ratings warned of greater losses and possible credit-rating downgrades for bond insurers.

"There may be value in the financials, but they're going to be driven by the market action and by the spillover effect of diminishing consumer demand," said Todd Steinberg, head of equities and derivatives for the Americas at BNP Paribas.

No sector was spared, though consumer staples and other defensive stocks avoided the heaviest losses. The technology-stock-led Nasdaq Composite Index fell 3.1%, or 73.28 points, to 2309.57, leaving it down 12.9% on the year and more than 19% off its October peak -- once again near bear-market territory.

Other sectors tied to the global economy, including materials and industrials, were hard-hit, as investors continued to second-guess strategies based on the idea that foreign economies can withstand a U.S. recession.

"The unexpected fly in the ointment is the pervasive investment in this international-decoupling growth story and the realization that that was probably not right," said Tony Dwyer, equity-market strategist at FTN Midwest Securities.

Asian markets were sharply lower in early trading Wednesday.

As Treasury prices rallied yesterday, the yield on the benchmark 10- year note was pushed down to 3.587%, its lowest since Jan. 25. The price rose 15/32 or $4.69 per $1,000 invested. Futures contracts tied to the federal-funds rate fully priced in a half-percentage-point rate cut by the Federal Reserve at its March meeting, which would follow two cuts totaling 1.25 percentage points so far this year.

The Standard & Poor's 500-stock index fell 3.2%, or 44.18 points, to 1336.64, also its worst one-day loss since last Feb. 27. The broad index is off about 9% so far this year, its worst start to a year ever, according to S&P. The index is down 14.6% from its Oct. 9, 2007, peak.

It may have further to fall. The S&P's intraday low of 1270.05 on Jan. 23 could be the bottom for the market, whether a recession begins or not. Some observers believe the index will again test that low, which marked an 18.5% decline from the S&P 500's peak. Stocks rarely enjoy neat, V-shaped recoveries, especially when the air is thick with recession talk.

The S&P 500 has fallen, on average, about 26% from peak to trough in the 11 U.S. recessions since World War II, according to Standard & Poor's.

"We're still in the early stages of this, so to see a retracement here won't be surprising," said Bill Groenveld, head trader at vFinance Investments in Boca Raton, Fla.

Despite the stock selloff and falling interest rates, the dollar gained against the euro. In late New York trading, one euro fetched $1.4635, down from $1.4827. European service-sector data also were weak, a hint the U.S. slowdown was affecting other parts of the globe. The dollar gained against the yen, rising to 106.86 yen from 106.74 yen.

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Tom Lauricella contributed to this article.