Stocks get gloomier by the minute

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NEW YORK (CNNMoney.com) -- Stocks got knee-capped Friday afternoon, extending their miserable start to 2008, after American Express's profit warning and Merrill Lynch's potential $15 billion writedown revived fears that the economy is heading into recession.

The acute economic fears have investors clamoring for more direct action from the Federal Reserve and they're betting that the central bank will slash rates at the conclusion of its next two-day meeting scheduled for Jan. 30.

The Dow Jones industrial average (INDU) lost around 220 points, or 1.7 percent with about 2 hours left in the session. The broader S&P 500 (INX) index fell 1.2 percent and the Nasdaq (COMP) composite fell around 1.7 percent.

American Express (AXP, Fortune 500) said late Thursday that it expects lower profit through 2008 because of slower spending and missed credit card payments. Shares of AmEx, a Dow component, slumped 10.7 percent Friday in active trading.

It was the second day in a row that a credit-card issuer said that subprime mortgage market problems are spiraling beyond that market.

On Thursday, Capital One Financial (COF, Fortune 500) warned that 2007 profit will miss previous estimates because of more loan delinquencies and its need to add to its fourth-quarter cash reserve.

Merrill Lynch (MER, Fortune 500) may have to writedown $15 billion in bad mortgage bets when it posts results next week, The New York Times reported. Analysts currently expect the financial behemoth to take a $12 billion writedown. The company is also apparently seeking to raise $4 billion in capital. Merrill shares rose modestly.

Next week brings earnings from Merrill and four other big banks, including Citigroup (C, Fortune 500), and results are expected to be pretty dismal amid the continued fallout from the credit and mortgage market crises. (Full story).

Bank of America (BAC, Fortune 500) said Friday that it was buying Countrywide Financial (CFC, Fortune 500) for $4 billion in stock, rescuing one of the hardest-hit lenders in the housing market fallout. Countrywide shares slumped 15 percent after rising more than 50 percent Thursday on market rumors about the deal. (Full story).

Stocks pulled out a last-hour rally Thursday after reports about a potential Bank of America-Countrywide deal first surfaced, in a rare up day in an otherwise terrible start to 2008.

Fears that the economy could be sliding into a recession have dragged on stocks so far this year. On Thursday, Federal Reserve Chairman Ben Bernanke said that the central bank does not think the economy is in a recession and that the Fed is willing to keep cutting rates to keep growth from slowing too rapidly.

Federal Reserve Governor Frederic Mishkin, speaking Friday afternoon, made similar comments, talking about the downside risks to the economy and the need for the central bank to be "flexible." Mishkin is a voting member of the Fed's 2008 policy committee.

Boston Fed President Eric Rosengren, in another speech, said that the housing market may weaken spending. Rosengren was a voting member of the Fed's 2007 policy committee but won't be in 2008.

According to futures trading at the Chicago Board of Trade, Wall Streeters are now betting that the central bank will cut rates by at least a half-percentage point when it meets on Jan. 29-30 to discuss policy. There is also a heightened possibility that the Fed will jump in and cut rates ahead of the meeting as well.

After falling more than 10 percent off the recent highs, stocks are closer to "bottoming," which could lead to a bigger bounce back, but are not there yet, analysts say.

"It's always difficult to judge bottoms, but when the fear levels are really high in areas that are important, like financials right now, that probably suggests we're getting closer," said Rob Lutts, chief investment officer at Cabot Money Management.

Stock declines were broad based with 24 out of 30 Dow components falling, led by AmEx, McDonald's (MCD, Fortune 500), Coca-Cola (KO, Fortune 500) and Procter & Gamble (PG, Fortune 500).

Intel (INTC, Fortune 500), Apple (AAPL, Fortune 500) and Yahoo! (YHOO, Fortune 500) were among the big tech stocks dragging on the Nasdaq.

Also weighing on the Nasdaq was RF Micro Devices (RFMD), which warned that it will post a quarterly loss rather than a gain, due to weaker demand. Shares of the maker of gear for mobile phones fell 24 percent in unusually active trade.

Juniper Networks (JNPR) slumped after the company said its chief operating officer is leaving for Microsoft, prompting a pair of analysts to downgrade the stock.

Luxury retailer Tiffany & Co. (TIF) plunged 12 percent after warning that fiscal 2007 earnings won't meet the high-end of its earlier forecast, sparking worries about a bigger consumer spending slowdown.

One bright spot was mortgage lender Washington Mutual (WM, Fortune 500), which jumped 6 percent in active New York Stock Exchange trade on news reports that it may be in talks with JP Morgan (JPM, Fortune 500) to be bought.

Market breadth was negative. On the New York Stock Exchange, losers topped winners 3 to 2 on volume of 1.01 billion shares. On the Nasdaq, decliners beat advancers 2 to 1 on volume of 1.4 billion shares.

In other news, the government said Friday that the November trade gap swelled to its highest level in 14 months, due to record oil imports.

Treasury prices rallied, lowering the yield on the 10-year note to 3.82 percent from 3.88 percent late Thursday as investors sought safety in government debt. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the yen and inched higher versus the euro.

U.S. light crude oil for February delivery fell 51 cents to $93.20 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery jumped $4.20 to $897.80 an ounce after briefly topping an all-time high above $900 an ounce in the morning.