Wall Street's terrible Tuesday

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NEW YORK (CNNMoney.com) -- Stocks tumbled Tuesday, continuing the abysmal start to the new year, on growing worries that the economy could be headed for a recession amid the credit and housing market fallout.

The Dow Jones industrial average (INDU) lost 1.9 percent. The broader S&P 500 (INX) index lost 1.8 percent and the Nasdaq (COMPX) composite lost 2.4 percent. The Russell 2000 (RUT.X) small-cap index fell 2.6 percent.

Stocks were volatile throughout the session, but then turned lower in the last hour on a mix of news - including AT&T's warning on its consumer business, questions about Countrywide Financial and a report showing a spike in consumer credit.

The market was also at the mercy of technical market factors, with all three major gauges now having fallen 10 percent off the highs hit in November, on a closing level, the technical definition of a market correction. In the next few days, this could spark a much bigger leg down, or bring in a wave of new money as investors seek to buy at lower levels.

"We've gotten very oversold, and we've seen this technical correction, so I wouldn't rule out a short-term rally," said Ryan Atkinson, market analyst at Balestra Capital.

"But I don't think we've put in a bottom here," he said. "We may be at the start of a bear market, which would be typical of a recession."

Although others are less inclined to call the recent selloff the makings of a bear market, it has certainly been a brutal start to the year.

Year-to-date, the S&P 500 has lost about 5.3 percent, the Dow industrials has fallen 5.1 percent and the Nasdaq composite has fallen 8 percent year-to-date.

"Although the year is very young, it's a discouraging start," said Art Hogan, chief market analyst at Jefferies & Co.

He said that investors are being faced with a barrage of issues that makes the market environment extremely challenging right now, including oil price shocks, nervousness around the presidential election and the risk of stagflation - an environment of slow growth and rising inflation.

Stocks have now fallen for four out of the first five trading days in 2008, a bad start to the year, or what the Stock Trader's Almanac calls an "early warning sign" for stocks. According to the Almanac, what the S&P 500 does in the first five trading days of the year can correlate with what it does in the full year.

But that statistic is most accurate when the first five days of the year are positive. When that happens, full-year gains follow 86.1 percent of the time, the Almanac said, looking at results stretching back to 1950. When the first five days are negative, full-year declines followed less than 50 percent of the time.

Stocks were volatile throughout the session Tuesday as investors considered management shakeups at Bear Stearns and Starbucks, spiking oil and gold prices, more housing market woes and dour comments on the economic outlook from government officials.

Investors tried to push stocks higher in the mid afternoon by scooping up some of the issues that were battered in last week's miserable start to the year, but the gains proved unsustainable.

Helping to cause the late session retreat: weakness in Countrywide Financial, even after the mortgage lender swatted away bankruptcy rumors; a report showing consumer credit card debt spike to the highest level in six months in November; and reports that Dow component AT&T (T, Fortune 500) sees weakness in its consumer business, which sent that stock falling 4.6 percent.

Bad news from the housing sector added to growing worries about the threat of a recession.

The National Association of Realtors said Tuesday morning that contracts to sell existing homes fell in November by a steeper-than-expected margin. The group also pushed back its forecast for a price rebound to 2009.

Treasury Secretary Henry Paulson said in a speech that housing market problems are not easing, Briefing.com reported. Meanwhile, Boston Fed president Eric Rosengren said that if forecasts pan out, the United States will see the longest housing investment decline in 50 years.

And builder KB Home (KBH, Fortune 500) reported a steeper-than-expected quarterly loss, all of which sent homebuilding stocks lower.

With worries that the economy could be heading into recession, Wall Street has been looking to the Federal Reserve to cut short-term interest rates by as much as a half-percentage point at the next policy meeting at the end of January.

Philadelphia Fed President Charles Plosser, speaking Tuesday morning, said that policy decisions are getting harder to make because inflationary pressures are rising and slow economic growth is no longer sufficient to take the edge off pricing pressures. However, he said he wouldn't be opposed to more cuts.

Plosser will be a voting member of the Fed's 2008 policy-setting committee, starting with the January meeting.

Fed chairman Ben Bernanke is due to speak Thursday afternoon in Washington D.C. on the economic outlook and monetary policy.

In other corporate news, Bear Stearns (BSC, Fortune 500) confirmed that its chief executive is stepping down amid the investment bank's big subprime losses, to be replaced by the bank's current president. Shares slumped after rising in the morning on the rumors of the executive shuffle.

Starbucks (SBUX, Fortune 500) said late Monday that it was replacing its CEO with its chairman and former chief executive, as well as closing under-performing stores. Shares rallied Tuesday.

The Starbucks news followed Monday's announcement that McDonald's (MCD, Fortune 500) will unveil its own coffee bars, complete with baristas, at its nearly 14,000 U.S. locations, taking on Starbucks' dominance in the area.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by close to two to one on volume of 1.82 billion shares. On the Nasdaq, decliners topped advancers three to two on volume of 2.59 billion shares.

Treasury prices rallied, lowering the corresponding yields, as investors sought safety in government debt, lowering the yield on the 10-year note to 3.77 percent from 3.83 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for February delivery rose $1.24 to settle at $96.23 a barrel on the New York Mercantile Exchange Tuesday.

COMEX gold for February delivery rallied $18.30 to $880.30 an ounce.