Stocks fall on fresh evidence of economic woes

NEW YORK — So much for the new-year rally.

Stocks endured their worst drubbing in a month Wednesday -- and crude oil plummeted the most in more than seven years -- as a batch of gruesome unemployment and corporate-profit reports reminded investors about the dire state of the U.S. economy.

The Dow Jones industrial average fell 245.40 points, or 2.7%, to 8,769.70.

Broader indexes posted steeper declines. The Standard & Poor’s 500 index dropped 3%, and the Nasdaq composite index gave up 3.2%.

U.S. employers chopped nearly 700,000 jobs from their payrolls last month, according to an industry report released Wednesday, raising fears that overall employment data due Friday from the Labor Department could be worse than expected.

Investors also were spooked by profit warnings from the likes of Time Warner Inc. and Intel Corp.

Time Warner said it would slash the value on its books of its cable-TV unit and other businesses by $25 billion, reflecting a decline in the earning capacity of those operations.

Intel disclosed that its fourth-quarter revenue shrank 23% from a year earlier.

Shares of Time Warner and Intel slumped more than 6%.

Alcoa Inc. tumbled 10% after the aluminum giant announced late Tuesday a big layoff and a plan to trim output.

Since Nov. 20, when the stock market hit its lowest point in the bear market that began 15 months ago, investors had shrugged off a string of glum economic reports on the theory that the bad news already was reflected in stock prices and that the recession could end by midyear.

But Wednesday’s reports indicate that layoffs are mounting more quickly than assumed and that company earnings may be deteriorating much more than projected.

The economic news “brought us back to the sobering reality of a very difficult economy,” said David Dietze, president and chief investment strategist at Point View Financial Services in Summit, N.J.

“We knew things were going to get worse,” he said. “But did we know they were going to get this bad this quickly, and what’s that going to do to consumer confidence?”

The sell-off reversed most if not all of this year’s early gains in the major stock averages. The Dow is now down less than 0.1% year to date, while the S&P; 500 is up 0.4%.

The Dow and the S&P; remain up 16% and 20%, respectively, from their Nov. 20 lows.

The ominous economic news contributed to the biggest drop in crude oil since 2001. The commodity fell $5.95, or 12%, to $42.63 a barrel after a government report showed a larger-than-projected increase in reserves.

Energy stocks slid along with the price of crude. The S&P; 500 energy index fell 3.9%. Exxon Mobil dropped 2.6%. Chevron declined 4.4%.

Financial stocks were also pounded, led by steep drops at insurance companies. Principal Financial Group slumped 11%, while MetLife sank 8.9%.

Investors cashing in recent gains probably contributed to Wednesday’s sell-off.

“You’re up 20-plus percent in some cases since mid-December,” said Chris Johnson, chief executive of Johnson Research Group in Cincinnati. “You’re going to have a lot of opportunity selling, locking in short-term gains against a market that’s questionable at best.”

Stocks may be entering a tough period as more firms report earnings. More bad surprises could reinforce the notion that the economy hasn’t shown any real signs of overcoming its malaise.

“The market was able to overlook bad news for some time,” Johnson said. “Now with Intel and Alcoa more or less starting to lay the foundation for a confessional period for earnings, investors are now looking down the barrel of reality.”

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