NEW YORK (CNN/Money) - U.S. stocks tumbled to their lowest levels of the year Wednesday after Intel, the No. 1 chipmaker, raised fears that tech companies aren't ready to spend the economy out of recession and J.P. Morgan showed how recent bankruptcies can harm lenders.
Intel slashed its capital budget, an announcement that rippled through shares of the company's rivals, customers and suppliers.
"Intel was really the harbinger about the tone of the recovery, when it comes, and that means it's not going to be very robust," Peter Kenny, CEO of his self-named New York Stock Exchange specialist firm, told CNNfn's Market Call.
Bad loans to bankrupt Enron and financially troubled Argentina came back to haunt J.P. Morgan Chase (JPM: down $1.67 to $36.20, Research, Estimates), which missed profit forecasts by a wide mark. Other financial stocks tumbled.
The latest market setback unnerved investors who, banking on recovery, have sent stocks higher since the market bottomed Sept. 21.
The Dow Jones industrial average, which has not had a winning year since 1999, widened its 2002 losses to 3 percent. And the Nasdaq composite index wiped out its gains for the year.
The Nasdaq fell 56.47 points, or 2.8 percent, to 1,944.44, taking it down 0.3 percent in 2002. The Dow industrials slumped 211.88, or 2 percent, to 9,712.27, its lowest close since Nov. 12, while the Standard & Poor's 500 index dropped 18.62, or 1.6 percent, to 1,127.57, widening its 2002 losses to 1.8 percent.
More stocks fell than rose. On the New York Stock Exchange, declining stocks topped advancing ones nearly 2-to-1 as 1.4 billion shares traded. Nasdaq losers beat winners by more than 2-to-1 as 1.8 billion shares changed hands.
In other markets, Treasury securities were mixed. The dollar rose against the yen and was flat versus the euro.
Chips are down
The first busy week for companies reporting fourth-quarter results has not been kind to Wall Street.
Intel said slumping demand for the chips that run personal computers took a bite out of operating profit, which fell 62 percent to 15 cents per share in the fourth quarter.
While that topped forecasts, Intel cut its capital spending budget for this year, a move that could hurt equipment suppliers Applied Materials (AMAT: down $4.06 to $41.55, Research, Estimates) and KLA-Tencor (KLAC: down $5.30 to $50.01, Research, Estimates).
Intel said sales will fall as much as 8.3 percent in the current quarter from fourth-quarter levels.
"We've seen no signs of an economic recovery," Andy Bryant, Intel's chief financial officer, told Reuters.
Losses spread to the chipmaker's customers such as Dell Computer (DELL: down $1.01 to $27.57, Research, Estimates) and Compaq Computer (CPQ: down $0.30 to $11.10, Research, Estimates).
Compaq after the closing bell reported a fourth-quarter profit that topped Wall Street estimates.
Intel rival Advanced Micro Devices (AMD: down $1.24 to $17.91, Research, Estimates), scheduled to report its results after the close, also fell.
Rory Robertson, interest rate specialist at Mcquarie Equities, said Intel's comments bode poorly for a recovery in businesses investment this year.
"It's bad news for the economic bulls," said Robertson, who said he would not be surprised if bonds outperformed the stock market in 2002 for a third straight year.
Worried that double-digit returns during the last three months made stocks expensive, Merrill Lynch advised clients Monday to sell stocks in favor of bonds.
In other losers, online auctioneer eBay (EBAY: down $4.09 to $59.94, Research, Estimates) cut current quarter sales forecasts after posting a profit in the last quarter that topped estimates.
Handspring (HAND: down $1.18 to $6.60, Research, Estimates), the maker of handheld communications devices, also suffered. The company said its losses widened to $19.8 million in its fiscal second quarter.
J.P. Morgan misses
J.P. Morgan said fourth-quarter profit tumbled to 12 cents a share from 37 cents in the year-earlier period, below the 34 cents per share consensus estimate of analysts surveyed by First Call. Losses spread to fellow Dow financial components American Express (AXP: down $1.25 to $36.50, Research, Estimates) and Citigroup (C: down $1.22 to $48.50, Research, Estimates).
General Motors (GM: down $0.21 to $49.75, Research, Estimates), the No. 1 automaker, said fourth-quarter profit fell nearly 50 percent to 60 cents a share in the latest quarter, although that topped forecasts by a penny a share.
The Dow's biggest loser, 3M (MMM: down $6.03 to $103.47, Research, Estimates), fell amid worries about exposure to asbestos lawsuits.
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The airline business was predictably tough in the final three months of last year as terrorism-wary travelers cut back on flying. AMR (AMR: up $0.23 to $26.02, Research, Estimates), the parent of American Airlines, and Continental (CAL: up $1.71 to $31.10, Research, Estimates) saw big losses.
But not all companies are having trouble drawing customers. Winnebago Industries (WGO: up $3.80 to $40.70, Research, Estimates) said rising demand for mobile homes would cause it to ramp up production.
In the latest setback for Kmart (KM: down $0.89 to $1.56, Research, Estimates), Standard & Poor's said it will drop the retailer from its index of 500 large companies. The move could prompt fund managers who mirror the index to sell the stock.
But no stock Wednesday endured bigger losses than drug developer Inspire Pharmaceuticals (ISPH: down $11.36 to $4.15, Research, Estimates). The company's stock fell 74 percent after saying tests of a drug to treat dry eye syndrome proved disappointing.
Tumbling energy prices showed up in the government's main inflation gauge. The Consumer Price index fell 0.2 percent in December, a week after producer prices also declined.
Falling prices could make it easier for Federal Reserve officials to cut interest rates when they meet later this month. But David Wyss, economist at Standard & Poor's, told CNNfn's Before Hours that the Fed is likely done lowering borrowing costs following 11 cuts last year.
"I think we are seeing signs that the economy is bottoming out," he said.
Retail sales, the housing market and consumer confidence have shown surprising strength of late. Still, the latest figures from the central bank showed that industrial output fell for a fifth straight month in December, as businesses ran at only 74.4 percent of capacity.
In its survey of conditions, the Fed served up a mixed assessment Wednesday, calling the economy "generally weak" but also pointing to "scattered points of improvement."
One area of relative improvement is the stock market, which has rallied after hitting three-year lows this fall. The Dow industrials are up 18 percent since Sept. 21 while the Nasdaq sports a 36 percent gain. 
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