Stocks sink on recession fears

Citigroup's almost $10 billion quarterly loss and a weak retail sales report revive worries about big slowdown.

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By Alexandra Twin, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Stocks tanked early Tuesday afternoon after Citigroup's steep quarterly loss and a big drop in retail sales exacerbated worries about the threat of recession.

The Dow Jones industrial average (INDU) lost around 200 points roughly 3-1/2 hours into the session. The broader S&P 500 (INX) index lost 2 percent and the Nasdaq composite lost 2.1 percent.

Citigroup (C, Fortune 500) reported an almost $10 billion quarterly loss that was worse than expected, slashed its dividend, and said it was taking an $18.1 billion writedown related to bad mortgage bets.

The company also said it was receiving a $12.5 billion cash infusion from investors in Kuwait, Singapore and the state of New Jersey. Shares slipped almost 7 percent. (Full story)

Citigroup is the latest financial leader to report weak profits and big writedowns amid the housing and credit market mess, adding to a sense of unease on Wall Street.

The stock market reaction right now is "logical," said Haag Sherman, managing director of Salient Partners, with investors catching up to and reflecting the current strained economic conditions.

He said investors are also starting to realize that monetary policy will not be enough to prop up equities this time. "I think there's a sense that the Fed can't help enough. Recession is on the way or already here."

The panic about the economy has investors clamoring for the Federal Reserve to cut interest rates more aggressively.

According to futures contracts on the Chicago Board of Trade, investors are now betting that the Federal Reserve will cut the fed funds rate, a key short-term interest rate, by a half-percentage point at its two-day meeting that ends Jan. 30. There is also the possibility that the central bank will cut rates by three-quarters of a percentage point, or 75 basis points. There are 100 basis points in one percentage point.

Ahead of that, the Federal Reserve said Tuesday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.95 percent. It was the third in a series of auctions the Fed has initiated to give banks much-needed cash.

While this is helping the banks, Sherman said because the banks are generally not in a position to extend credit, the auctions are not really helping consumers, with consumer continuing to be strapped, as the retail sales report demonstrated.

Retail sales fell 0.4 percent, short of forecasts and the biggest drop in six months. Excluding volatile auto sales, retail sales also fell a worse-than-expected 0.4 percent.

Merrill Lynch (MER, Fortune 500), which reports quarterly results Thursday, said it had received a $6.6 billion cash infusion from investors in Kuwait, Korea and Japan, among other areas of the world. Despite the investment, Merrill shares slipped. (Full story).

JP Morgan Chase (JPM, Fortune 500), Morgan Stanley (MS, Fortune 500), Lehman Brothers (LEH, Fortune 500) and Bank of America (BAC, Fortune 500) were among the big financial companies tumbling Tuesday.

But declines were broad-based, with all 30 of the Dow components sliding.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost four to one on volume of 810 million shares. On the Nasdaq, advancers topped decliners by over three to one on volume of 1.13 billion shares.

In other economic news, the Producer Price Index (PPI), which measures inflation at the wholesale level, fell 0.1 percent, versus forecasts for a rise. Core PPI, which excludes volatile food and gas prices, rose 0.2 percent, as expected.

Overall wholesale inflation rose 6.3 percent in 2007, the government said, the worst annual increase in 26 years.

Treasury prices rallied, lowering the yield on the 10-year note to 3.73 percent from 3.76 percent late Monday as investors sought safety in government debt. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery fell $1.80 to $92.40 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery jumped $4.30 to $907.70 an ounce. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.