Recession fears pound stocks

The benchmark Dow Jones industrial average fell 512.76 points to close at 11,383.68. Another key marker, the Wilshire 5000 Total Market index, the broadest measure of US stocks, lost $800 billion in value - its worst single-day performance since January 2009.

Yesterday was the eighth day in nine trading sessions that stock prices have declined, and the Dow has now exceeded the 10-percent drop from recent highs that mark a so-called "market correction," signaling a shift in investors' sentiment that the immediate economic future is worsening.

"The velocity and the magnitude of the decline was surprising to me," said Tom Manning, chief investment officer at Silver Lake Advisors, an investment firm in Boston. "Fears of a recession seemed to grip investors all day long."

Investors have been spooked by a series of reports and events - beginning last Friday - that undermined the once widely held view the US economy was in recovery mode from the recent recession and poised to grow at a faster pace through the second half of the year. That early outlook had served as the basis for everything from stock market values to business plans to political campaign strategies.

But a much different picture has emerged in the past few days: economic growth so anemic that the once-distant thoughts of another recession now don't seem so far-fetched. Last Friday, the government reported that the nation's gross domestic product grew at a slower-than-expected pace during the second quarter and also sharply revised its previous report on growth in the first three months of 2011. Additional economic reports that followed showed output from factories and service businesses, and consumer spending had all turned sluggish in July.

"Economic indicators are coming in worse than anticipated and decision-making is frozen," said Sara Johnson, a global economist at IHS Global Insight, an economics firm in Lexington. Johnson said her firm had estimated the chance of a new recession at 25 percent but "at this point we'd probably raise it to 30 percent."

The next key indicator of where the US economy is headed will come this morning when the government reports on the nation's unemployment rate for July. Most forecasts expect the rate to remain unchanged at 9.2 percent.

One feature of the current market downturn is the extreme measures investors are willing to take to safeguard their money in such a volatile time - including the extraordinary step of paying a bank to take their money. Yesterday Bank of New York Mellon Corp. said it would begin charging a fee to some institutional clients for "extraordinarily high" cash deposits. The move follows a flood of withdrawals from money market mutual funds - more than $100 billion over a recent one-week period - as investors and corporations appeared to be putting that cash into banks.

Investors are also showing a willingness to accept paltry, even negligible, returns from traditional safe havens. The interest yield on popular 2-year Treasury notes hit record lows yesterday of 0.25 percent, and rates for other short-term government debt approached 0 percent.

The price of oil and other raw materials also fell sharply yesterday, another indication investors are bracing for a slower economy. Oil was down 3.8 percent, to $88.44 a barrel, its lowest price in nearly six months. And an index that tracks the prices of 24 different commodities showed each one losing value yesterday.

The latest stock market setback wiped out any gains in US equity prices for 2011 gains; The Dow average is down 11.1 percent since April 29, while the Standard & Poor's 500 index is down 12 percent.

Those setbacks have been discouraging to many individual investors who have endured the volatile investment climate and struggled through hard economic times.

Tom Killilea, a 74-year old retired schoolteacher from Belmont, said that despite losses in his retirement account, he doesn't plan to make investment changes. The sharp fall in stock prices proves the economy isn't getting better, Killilea said, and "there's no reason to be optimistic" it will turn around soon.

Some within the investment community, while agreeing the recent economic news has been troubling, believe markets have overreacted and driven prices too low.

"It's pretty bleak, although the economy doesn't seem nearly as bleak as the market would suggest," said Ken Taubes, the US chief investment officer for Pioneer Investments in Boston.

But there are continuing signs of a global economic slowdown popping up around the world; Concerns over the European debt crisis have spread to include Italy in the collection of countries that may have trouble paying their bills.

"In the last few days we've been able to look at things without a European summit or a federal debt ceiling negotiation hanging over our heads," said Erik Weisman, a portfolio manager at MFS Investment Management in Boston. "People now realize that the landscape has shifted under our feet."

Globe correspondent Taryn Luna contributed to this report. Steven Syre can be reached at syre@globe.com.