Stocks stumble on recession fears

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Recession Watch 2008

• Consumer confidence at 5-year low
• Musical chairs at the mall
• U.S. ready to act to calm markets - Paulson
• Bush tax cuts center stage in Congress
• Slower growth, but no recession - forecast

NEW YORK (CNNMoney.com) -- Stocks closed lower Monday, the third day in a row, amid signs that the financial services sector could see more writedowns and concern that upcoming economic reports will point to recession.

The Dow Jones industrial average (INDU) fell nearly 1.3%, falling to its lowest level since Oct. 3, 2006.

The broader Standard & Poor's 500 (SPX) index lost 1.55%, putting it at its lowest level since Aug. 14, 2006. The Nasdaq composite (COMP) was nearly 2% lower, its worst level since Sept. 8, 2006.

Stock losses were broad based Monday with 26 of the Dow 30 declining. McDonald's Corp led gainers while banking giant Citigroup (C, Fortune 500) led decliners.

Meanwhile, oil prices surged Monday setting a new closing record of $107.90 a barrel and gas prices appeared set to break their previous record of $3.227 a gallon at the pump.

Tuesday brings a government report on export and import activity which could shed light on consumer confidence. Also out Tuesday, a report from the Labor Department on initial claims for unemployment benefits.

Supermarket operator Kroger (KG) is expected to report lower earnings Tuesday when the company releases its fourth-quarter results.

Wall Street was hit Monday with renewed signs of weakness in the financial services sector as rumors circulated that a number of large investment banks could disclose more writedowns.

Shares of Lehman Brothers (LEH, Fortune 500) fell nearly 6% after a report that the Wall Street bank is planning to cut 5% of its workforce, or about 1,400 jobs. Lehman will report first-quarter results next Tuesday.

A research report from a Citigroup analyst said Lehman could write down an additional $1.6 billion. The report also forecast a $3.2 billion writedown by Goldman Sachs (GS, Fortune 500), $2.9 billion for Merrill Lynch (MER, Fortune 500) and $1.2 billion at Morgan Stanley (MS, Fortune 500).

Bear Stearns (BSC, Fortune 500) stock fell more than 9% after reports that Moody's had downgraded some of the brokerage's corporate debt. A Bear spokesman said the reports were false.

"There's no reason to buy right now," said Ryan Larson, senior equity trader at Voyageur Asset Management. "It's sell first, ask questions later."

Stocks were also pressured by a report out Friday from the Labor Department that said employers cut 63,000 jobs in February, the largest cut in five years.

The discouraging jobs report revived fears that the economy is on the brink of recession, and led to some speculation that the Federal Reserve could make an emergency rate cut ahead of the central bank's meeting scheduled for next week.

The report "left a bad taste in the market's mouth," on Monday, Larson said.

Mortgage lenders in focus. Fannie Mae (FNM) tumbled 12% after Barron's suggested the mortgage backer may need a government bailout if the housing market continues to deteriorate.

The FBI is looking into fraud allegations against mortgage lender Countrywide Financial (CFC, Fortune 500), a U.S. government official told CNN. Countrywide dropped 13%.

Shares of Thornburg Mortgage (TMA) fell nearly 56% after the lender was downgraded by a Jefferies & Co. analyst less than a week after one of the company's creditors issued a default notice.

Corporate news. Among the 30 stocks that make up the Dow, McDonald's (MCD, Fortune 500) rose 2.5% after the world's largest hamburger chain said its global same-store sales rose 11.7% last month, driven by growth in Europe and the benefit of an extra selling day this year.

Elsewhere, shares of drugmaker Wyeth (WYE, Fortune 500) fell slightly after the company said it will invest $280 million in a nutritional plant to be built in China.

Publicly held private equity firm Blackstone Group (BX) said Monday that it swung to a fourth-quarter loss related to the company's investment in bond insurer Financial Guaranty Insurance Co. and weakness in the credit market.

Shares of bond insurer Ambac Financial Group (ABK) fell more than 22%.

Chevron (CVX, Fortune 500) and its partners have approved an investment of $3.1 billion to develop a gas project in the Gulf of Thailand. Shares edged lower.

Economic news. The Commerce Department reported Monday that wholesale inventories and sales grew in January.

Wholesale inventories grew a larger-than-expected 0.8% in January to a seasonally adjusted $414.82 billion, after a 1.1% increase in December.

However, economists have suggested that the rise in wholesale inventories could be a product of inflation caused by a rapid increase in the price of some key commodities.

Other markets. U.S. light crude oil for April delivery settled up $2.75 to $107.90 a barrel on the New York Mercantile Exchange. Oil prices briefly traded at $108 a barrel Monday setting a new trading record.

In currency trading, the dollar dived to its lowest level versus the yen in three years and fell against the euro. The greenback touched a fresh record low against the euro Friday on the weak jobs report.

COMEX gold for April delivery rose $2.20 to $972.00 an ounce in New York following last week's run up. Gold prices, along with other dollar-traded commodities, have surged in response to the weak greenback.

Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.45% from 3.54% late Friday. Bond prices and yields move in opposite directions.