Stocks stumble on economy, earnings worries

Wall Street ended its worst January ever by stumbling again over the banking system and the economy.

The major indexes all fell sharply for the second straight day, leaving the Dow Jones industrial average and Standard & Poor’s 500 index with record percentage drops for January — 8.84 percent and 8.57 percent, respectively. Some market watchers believe that’s a bad omen for the rest of the year, as the market usually ends a year down after having fallen in January.

Investors began the day on edge about the economy and were further rattled by reports that the government’s plans to help banks may have hit a snag. Investors have been hoping that the government would create what’s being called a “bad bank” to buy financial companies’ toxic assets, removing them from banks’ balance sheets. But some in Washington suggested the administration may be re-examining that idea because of its cost.

“So many people were anticipating good announcements about the bad bank over the weekend, but now, not expecting any good news,” said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and the Burnham Financial Services Fund.

Earlier in the day, investors found little solace in a milder-than-expected report on fourth-quarter economic activity. In fact, the report only heightened concerns that the economy is worsening.

Gross domestic product, the widely followed measure of the economy, shrank at a 3.8 percent pace in the final three months of 2008, the Commerce Department reported. That compared with a 0.5 percent decline the previous quarter.

Friday’s reading was much better than the 5.4 percent drop economists expected. But many analysts suspect the economy is shrinking at an even faster pace in the first quarter. Weak earnings reports and rising job losses are helping to solidify that belief.

“We expected fourth quarter to be the worst of the recession,” said Randy Frederick, director of trading and derivatives at Charles Schwab. “From an investor’s perspective, they may see this stronger-than-expected report setting us up for the first quarter to be worse.

“Each time you get a report that indicates that maybe we hadn’t bottomed out yet, it prolongs the recovery.”

The Dow fell 148.15, or 1.82 percent, to 8,000.86 after falling 226 on Thursday on negative employment and housing news.

The S&P 500 fell 19.26, or 2.28 percent, Friday to 825.88, and the Nasdaq composite index fell 31.42, or 2.08 percent, to 1,476.42.

The Russell 2000 index of smaller companies fell 9.71, or 2.14 percent, to 443.53.