"The report drives a nail into the coffin from investors' minds that we're in a recession," said Todd Salamone, director of trading at Schaeffer's Investment Research. "That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell."
It's possible the service sector, which includes businesses ranging from restaurants to retailers to banks, could bounce back in February as the manufacturing sector did in January after its December contraction. The benefit of the Federal Reserve's two big interest rate cuts in the latter part of January could also help spur the service sector back into growth mode later this year.
Still, the data was particularly worrisome given last week's Labor Department report, which showed that the U.S. economy lost jobs in January for the first time in more than four years. Together, the two reports indicate that the ongoing credit crisis is dragging down the actual economy. Fitch Ratings' plans to lower the rating on more than $100 billion wrapped up in bond funds called collateralized debt obligations added to the host of concerns plaguing Wall Street. Further downgrades would mean the securities -- many of which are backed by mortgages -- are worth even less than many investors thought. That could cause more problems for strugging banks, brokerages, and bond insurers. According to preliminary calculations, the Dow fell 370.03, or 2.93 percent, to 12,265.13. The broader Standard & Poor's 500 index lost 44.14, or 3.20 percent, closing at 1,336.68, while the Nasdaq composite index lost 73.28, or 3.08 percent, to 2,309.57.
