Investors who for months had been able to largely shrug off discomfort about subprime mortgage problems and a more difficult environment for corporate borrowing finally decided it was time to sell after the Commerce Department issued another disappointing home sales report.
New home sales for June were worse than expected, down 6.6 percent from May, reports CBS News correspondent Kelly Wallace.
Feeding the plunge were concerns that higher corporate borrowing costs will curb the rapid pace of takeovers that had driven stocks higher this year. Investors also feared the sluggish environment for home sales and continued defaults in subprime loans would spur debt defaults and weigh on corporate earnings.
Also affecting the market, analysts say, is a sign the era of easy credit is over. Lenders are tightening their standards and that's holding up big corporate deals like Chrysler's pending sale—and making home mortgages more difficult and expensive to get, reports Wallace.
"These aren't all brand new worries, but they all accentuated today by some clear evidence that some of our fears are coming true," Art Hogan, Jeffries and Co.'s chief market analyst told Wallace.
"We expected things to be bad, but not as bad as they came in."
While stocks plummeted, investors poured money into the safe haven of the bond market. The soaring price of Treasurys pulled yields lower, and the rate on the 10-year note plunged to 4.79 percent from late Wednesday's 4.90 percent.
"Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni, president of Yardeni Research Inc. "It's show time."
Thursday's trading was the latest and most extreme in a series of frenetic sessions over the past month — many also accompanied by triple-digit swings in the Dow — as investors sold on worries about the subprime fallout or bought on optimism that there wouldn't be any widespread problems caused by mortgage failures. Many analysts have described the back-and-forth trading as overwrought and based more on gut emotion than careful consideration of market and economic fundamentals.
That was their feeling again Thursday.
"The rally in bonds at this point looks a little bit overdone," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. "If you're going to park money temporarily, then cash I think is the way to be. But I think that we're going to form a bottom. I think people are going to be legging it back into the market."
The Dow plunged 311.50 or 2.26 percent, to 13,473.57 after falling 449.77 in earlier trading. The plunge was its worst since the 416.02 it lost on Feb. 27, when a drop in the Shanghai stock market rattled world exchanges.
Broader market indicators also slid. The Nasdaq composite index tumbled 48.83, or 1.84 percent, to 2,599.34, while the Standard & Poor's 500 skidded 35.43, or 2.33 percent, to 1,482.66.
The declines triggered a global sell-off in stocks, causing minor losses in Europe to accelerate rapidly along with the Dow's drop. In Europe, Britain's FTSE 100 closed down 3.15 percent, Germany's DAX index dropped 2.39 percent, and France's CAC-40 fell 2.78 percent.
Markets were closed in Asia before the rout got under way. Japan's Nikkei stock average closed up 0.88 percent and the Shanghai stock market composite added 0.52 percent to an all-time high.
Wall Street also found more immediate reasons to sell during the session — primarily the home sales figures from the Commerce Department, which further eroded confidence in the housing industry's ability to rebound.
The department reported that sales of new homes fell 6.6 percent last month to a seasonally adjusted annual rate of 834,000 units, more than triple what had been expected and the largest percentage drop since sales fell by 12.7 percent in January.
This boosted anxiety after quarterly results from home builders including Pulte Homes Inc. and D.R. Horton Inc. were squeezed by a sluggish environment from home sales and continued defaults in subprime loans.
"Wall Street continues to walk a wall of worry," said Ryan Larson, a senior equity trader at Voyageur Asset Management. "The housing market continues to be a story, and nobody knows when it will rebound. But, the real concerns are about credit and oil pushing higher."
Also stunting stocks was the Commerce Department's disappointing durable goods report. Though sales of big-ticket items increased by 1.4 percent last month to a seasonally adjusted $217.07 billion, durable goods, excluding transportation equipment, had an unexpected drop.
The Labor Department reported that jobless claims fell by 2,000 to 301,000 in the week ended July 21, slightly better than analysts' expectations.
Investors also reacted negatively as oil prices climbed to almost $77 per barrel during the session, stoking the market's worries about inflation. However, crude pared gains in the afternoon when a barrel of light sweet crude fell $1.23 to $74.95.
It all led to a frantic day for stock traders.
"It has been pretty volatile as of late, but now fears about a credit crunch are spreading more than they have in the past — and that's causing this drop,' said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds. "That's hurting the financials, and now energy companies are joining the party because oil is so high. They make up a large part of the S&P 500."
Wall Street, now at the peak of second-quarter earnings season, has been extremely volatile lately — a signature of typically slower trading that has been heightened by record runs in major market indexes. On Thursday, declining issues beat advancers by a 14 to 1 basis on the New York Stock Exchange, where volume came to a record 2.78 billion shares.
Both NYSE Group Inc. and Nasdaq Stock Market Inc. reported that their electronic trading systems were functioning normally, and no problems had been reported.
Ford Motor Co. rose 12 cents to $8.09 after it reported cost-cutting and a turnaround in its core automotive operations pushed its second-quarter to a profit. The company had posted seven quarters of losses as it grappled with sluggish sales and a major overhaul of its operations.
The Nasdaq's losses weren't as steep as other major indexes during the session due to strength from Apple Inc., which surged $8.74, or 6.4 percent, to $146.00. The iPod and iPhone maker's earnings easily surpassed Wall Street projections late Wednesday due to strong sales from its computer offerings.
Home builders sank after several disappointing reports. D.R. Horton fell 32 cents to $17.16 after it posted a fiscal third-quarter loss on charges to write down the value of unsold inventory and deposits on land.
Pulte fell 63 cents, or 3.1 percent, to $20.04 after it posted a second-quarter loss amid the struggling housing market.