Recession fears batter stocks

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NEW YORK (CNNMoney.com) -- Stocks tumbled Tuesday after Citigroup's steep quarterly loss and a big drop in retail sales exacerbated fears of a recession.

The Dow Jones industrial average (INDU) lost around 277 points, seeing its biggest one-day point loss of 2008. The decline left the Dow at a 9-month low.

The broader S&P 500 (INX) index lost 2.5 percent and fell to a 10-month low. The Nasdaq composite lost 2.5 percent and fell to a nearly 10-month low.

Treasury prices rallied as investors sought safety in government debt, sending the 10-year note yield down to a nearly four-year low. The dollar slipped versus the yen and gained versus the euro. Oil and gold prices fell.

After the close Tuesday, Intel (INTC, Fortune 500) reported quarterly results and an outlook that disappointed investors, sending shares of the chipmaker tumbling in after-hours trade.

Intel also knocked stock futures lower, suggesting a big selloff at Wednesday's open.

The short-term outlook for the market looks pretty miserable, said Donald Selkin, director of research at Joseph Stevens. He said that stocks are looking at more declines, unless some really strong earnings come out or the Fed takes action ahead of the next policy meeting.

"Between the banks and Intel, you have a pretty weak lineup of earnings this week," Selkin said. "What are any of these companies going to say that's so great?"

JP Morgan and Wells Fargo report earnings Wednesday morning and both are expected to post yearly declines.

And amid the economic anxiety, investors are clamoring for the Fed to announce an emergency interest-rate cut ahead of the next policy meeting, which concludes Jan. 30.

"The Fed is really beyond the curve," Selkin said. "Look at the retail sales, look at the 10-year bond yield. The economy needs something here, it needs someone to put more money into consumer hands."

On Wednesday, the Joint Economic Committee holds a hearing on what action the Federal Government should take to help avoid a recession.

Economic reports are also due Wednesday on consumer prices, industrial production and capacity utilization and the Fed's beige book read on the economy.

Citigroup (C, Fortune 500) reported an almost $10 billion quarterly loss Tuesday morning 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 8 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 difficult 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 Fed is expected to cut interest rates at the next meeting, but the worry is that it won't be sufficient to stop the slide into recession.

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 consumers 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).

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.

Declines were broad-based, with all 30 of the Dow components sliding. Alcoa (AA, Fortune 500), Boeing (BA, Fortune 500), Caterpillar (CAT, Fortune 500) and General Motors (GM, Fortune 500) were among the biggest losers.

Boeing (BA, Fortune 500)'s decline followed a Wall Street Journal report that said the company is about to announce delays in its 787 Dreamliner jet program.

eBay (EBAY, Fortune 500), Yahoo! (YHOO, Fortune 500), Intel (INTC, Fortune 500) and Cisco (CSCO, Fortune 500) were among the big tech losers on the Nasdaq.

In other news, Apple confirmed Tuesday at its Macworld conference that it will be offering movie rental downloads from all of the major studios, representing a direct threat to companies such as Netflix (NFLX) and Blockbuster (BBI, Fortune 500).

Apple also announced it will be offering a new super thin laptop computer and new software for the iPhone and iPod iTouch. Apple (AAPL, Fortune 500) shares slipped 5.5 percent.

On the upside, airline stocks gained in response to falling oil prices, and some merger talk. Delta Air Lines (DAL, Fortune 500) is looking to merge with either Northwest Airlines (NWA, Fortune 500) or UAL (UAUA, Fortune 500), the Wall Street Journal reported.

The Amex Airline index jumped 3.2 percent.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by nearly 3 to 1 on volume of 1.82 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.

Another report, the NY Empire State index, which measures regional manufacturing, fell more than expected.

Treasury prices rallied, lowering the yield on the 10-year note to 3.68 percent from 3.77 percent late Monday as investors sought safety in government debt. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery fell $2.30 to settle at $91.90 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell 90 cents to settle at $902.50 an ounce.