Stocks tank on recession fears

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NEW YORK (CNNMoney.com) -- Stocks tanked Wednesday, the first trading day of 2008, as oil and gold prices at record highs and a report showing contraction in the manufacturing sector raised worries about the threat of recession.

The Dow Jones industrial average (INDU) lost 220 points, or nearly 1.7 percent. The broader S&P 500 (INX) index fell 1.4 percent and the tech-fueled Nasdaq (COMPX) composite lost 1.6 percent.

Stocks briefly trimmed losses after the mid-afternoon release of the minutes from the last Federal Reserve meeting raised bets that more interest rate cuts are on the way. But any recovery attempt was short lived.

Treasury prices jumped, lowering the corresponding yields, as investors sought safety in bonds. The dollar slipped. Oil and gold prices jumped.

Worries about how the fallout in the credit and housing markets will impact the economy dragged on stocks in the second half of last year and remained in focus at the start of 2008.

Adding to such worries: a December survey showing the first contraction in manufacturing activity since January 2007 and the weakest reading since April 2003.

The Institute for Supply Management's manufacturing index fell to 47.7 from 50.8 in November, versus forecasts for a drop to 50.5. A reading below 50 signals contraction.

Meanwhile, oil and gold prices spiked to new records.

U.S. light crude oil for February delivery briefly topped $100 a barrel for the first time ever, before pulling back a bit to end at a record settle price of $99.62 a barrel. (Full story).

COMEX gold for February delivery surged $23.20 to $861.20 an ounce, an all-time high, rising in tune with other dollar-traded commodities.

"You take the ISM number showing lower growth and top it off with oil higher on the geopolitical unrest and you have a nice little stew there," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

The afternoon also brought the minutes from the Federal Reserve's Dec. 11 policy meeting, at which the central bankers cut interest rates for a third meeting in a row. Released at around 2:00 p.m. ET, the minutes showed that deteriorating conditions in the housing, credit and financial markets prompted the cut.

The policymakers were uncertain about the economic outlook at the time, and left the door open for further interest rate cuts.

Worries about the pairing of weaker growth and higher inflation raise the threat of recession, but also of so-called "stagflation," Saluzzi said, all of which adds to the anticipation for Friday's December labor market report.

"If the payrolls number is worse than expected, watch out below," he said.

Employers are currently expected to have added 70,000 jobs last month, after adding 94,000 in the previous month. Ahead of that, the ADP private sector employment report is due Thursday. The ADP report is generally seen as a harbinger of the broader monthly report.

Thursday also brings the November factory orders report.

Stocks managed to post gains in an extremely volatile 2007, with the Dow rising 6.4 percent, the S&P 500 adding 3.5 percent and the Nasdaq climbing 9.8 percent.

2008 is expected to be just as volatile, as investors continue to try to assess the economic outlook in the wake of the housing and credit market fallout.

Market breadth was negative. On the New York Stock Exchange, losers beat winners nine to seven on volume of 1.42 billion shares. On the Nasdaq, decliners topped advancers by almost two to one on volume of almost 2.08 billion shares.

Among stock movers, 29 out of 30 Dow components slid. Declines were led by Intel (INTC, Fortune 500), which fell on a Banc of America Securities downgrade, according to Briefing.com.

Banc of America also downgraded other stocks in the semiconductor sector, including Texas Instruments (TXN, Fortune 500) and National Semiconductor (NSM).

Starbucks (SBUX, Fortune 500) slumped after a Bear Stearns analyst downgraded the coffee chain to "peer perform" from "outperform."

One of the few bright spots was Amazon.com (AMZN, Fortune 500), which rose 3.9 percent after Citi Investment Research upgraded it to "buy" from "hold."

Treasury prices rallied, as investors sought safety in the comparatively safer haven of government debt, lowering the yield on the 10-year note to 3.90 percent from 4.03 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the euro and the yen.