Perfect storm rakes markets

NEW YORK — The Dow Jones industrial average plummeted 344 points Thursday on a confluence of poor news about the economy, although investors could not pin the drop on any overriding reason.

Reports showed retail sales were weak in August, just as more Americans filed for unemployment benefits. Anxiety lingered about a global slowdown. Fears of another financial crisis refused to go away.

None of the news came as a shock to Wall Street. So what pushed the Standard & Poor's 500-stock index down 3 percent, its worst daily performance in three months?

"Boy, it's hard to say," Douglas Peta, a market strategist at J&W Seligman, said after the market's close. "All of us were scratching our heads. Why today?"

Explanations were proffered, but rarely proved.

Speculation ran rampant that some major hedge funds were rapidly selling off their assets. Atticus Capital, a $14 billion hedge fund, was forced to issue a statement denying that it was shutting down.

Two prominent regional banks, National City and First Horizon, had their credit ratings slashed by S&P on concerns about credit and losses related to subprime mortgages. Bill Gross, the head of Pacific Investment Management, said banks were at risk of a coming "financial tsunami."

The Labor Department reported that the number of Americans who filed initial claims for unemployment benefits last week rose to near a five-year high.

And retailers said sales were weak in August, as consumers opted to shop at discount stores. The reports suggested that profits at many retailers would continue to fall even as gas prices drop.

Even oil falling $1.46 on Thursday to settle at $107.89 a barrel didn't cheer up traders.

By the end of the session, the S&P 500, the broadest measure of the U.S. stock exchanges, had sank back into a bear market. The Nasdaq composite index lost 3.2 percent. The Dow closed down 3 percent at 11,188.23.

The only certainty that arose from the painful session seemed to be the stock market is in a fragile state, and it's likely to stay that way.

"If you don't like the moves in the market, just give it a half-hour," Peta said. "That seems to have been the rule of the summer."

Wall Street is coming off a choppy few weeks, as lighter trading volume in August contributed to a fitful run of big gains followed by big losses. An index of market volatility spiked Thursday by more than 12 percent to its highest level since July.

Lower oil no help

"It's like the markets can't really be happy one way or the other," Ryan Larson, a trader at Voyageur Asset Management, said. He noted that the recent declines in oil prices had done little to reassure investors.

"When oil was $145, everyone screamed inflation. At $105, everyone is screaming, 'Where is the demand?,' " he said. "The picture that is starting to develop is that people are worried that the global economic slowdown is beginning to pick up steam."

Energy stocks plummeted on the decline in oil, which soured investors' mood on refineries and commodity companies. Exxon Mobil fell 2.4 percent, and Chevron was off 3.5 percent.

Retailers suffered, too. Abercrombie & Fitch lost 6.8 percent, and shares of Target fell 2.2 percent.

"Lower oil prices were going to help this consumer stand up," Larson said. "It's not the case."

Investors will now turn their attention to data being released today by the Labor Department, which will report the unemployment rate for August and estimate how many Americans were laid off during the month.

Economists expect the economy to have shed 70,000 jobs more in August. A worse-than-expected showing would be an ominous sign for the economy's health for the rest of the year.

Other economic data released Thursday was more positive. Productivity was revised up to 4.3 percent last quarter, higher than economists had estimated.

A separate private report showed activity in the services sector grew slightly in August after contracting for months.

The nonmanufacturing index of the Institute for Supply Management rose to 50.6 from 49.5 in July, on a scale where readings above 50 indicate growth.

The Labor Department reported Thursday that new applications for unemployment insurance rose 15,000 from the previous week to 444,000. Economists had expected claims to drop to 420,000.

Many predict joblessness will continue to rise for the rest of the year. A separate report Thursday indicated hiring by companies in the service sector has declined.

Labor picture worsens

"Across the board, we're seeing evidence that labor conditions are worsening," said Carl Riccadonna, senior economist at Deutsche Bank Securities.

A tougher job market can crimp consumer spending as laid-off workers and those who fear for their jobs cut back.

"The second half of this year does not look good," Riccadonna said. "Consumer spending is stalling."

Richard Fisher, president of the Federal Reserve Bank of Dallas, also predicted a weak economy for the next several months.

"I think it is very likely we will suffer anemic growth for the current and perhaps the next couple of quarters," he said in a speech in Houston.

Seattle-based Nordstrom reported Thursday that sales at stores open at least a year fell 7.9 percent in August.

Nordstrom is offering more lower-priced merchandise and shifting promotions in response to customers' spending habits.

"It is clear that the consumer has become more value- oriented," Chief Financial Officer Michael Koppel told investors at a Goldman, Sachs conference in New York. "Customers are being more sensitive to pricing."

Nordstrom stock fell $1.34, or 4 percent, to $31.99. The shares have declined 13 percent this year.

On Wednesday, Issaquah-based Costco posted a 9 percent gain in same-store sales for August, and Everett-based action-sports retailer Zumiez said sales rose 13.1 percent.

Material from The Associated Press and Bloomberg News was used in this report.