Fear of Slump Batters Wall St.

Stock prices suffered their hardest fall in more than two years Friday -- with the Dow Jones industrials plunging more than 190 points -- as evidence mounted that the U.S. economy’s once-robust growth is slowing.

Even another drop in oil prices, to nearly $50 a barrel, couldn’t ease the malaise on Wall Street amid a growing debate over whether the economy is merely hitting a soft patch or is at risk of a more serious pullback.

Either way, “investors are in a lousy state of mind,” said Al Goldman, chief market strategist at investment firm A.G. Edwards & Sons Inc. in St. Louis. Another sharp downturn Monday could put the Dow Jones industrial average below the 10,000 mark.

Friday’s retreat was partly a reaction to disappointing profit at IBM Corp. and a slump in consumer sentiment, as reported by a widely watched survey.

But the sell-off began Wednesday, triggered by data signaling that the stout economic growth of the last two years had slowed, hobbled in part by high energy prices. Reports on retail sales and industrial production both failed to meet expectations this week.

“This suggests an economy that is rapidly losing steam,” Kathy Bostjancic, senior economist at Merrill Lynch & Co., said Friday in a note to clients.

The Dow plummeted 191.24 points to 10,087.51, its steepest daily drop since March 24, 2003, and its third straight decline of 100 points or more -- the first time that’s happened since January 2003.

That gave the blue-chip index a loss for the week of nearly 374 points, or 3.6%, its worst weekly showing in more than two years, and dropped the average to its lowest level since election day on Nov. 2. Broader market indexes also suffered sharp declines.

Some analysts said Wall Street was overreacting, contending that the economy wasn’t in danger of falling into recession and in fact was continuing to expand at a respectable pace.

Anthony Chan, senior economist with J.P. Morgan Asset Management, said the markets had shifted in a matter of months from believing that the economy was overheating to fearing that it would plunge into recession.

“Both of those extremes were exaggerated,” Chan said.

Even so, warning signs abound. IBM -- a bellwether for technology spending -- posted disappointing first-quarter earnings after the market closed Thursday. Its shares plummeted nearly 9% on Friday to $76.70 a share. Because IBM is a major component of the Dow, it contributed heavily to Friday’s damage on Wall Street.

Job growth also has eased both nationally and statewide. California added a relatively scant 17,600 jobs in March, the state’s Employment Development Department said Friday.

The stock market is seen by many as an indicator of future economic trends, since investors are buying and selling based on whether they see corporate profits and consumer spending rising or falling in the coming months.

Stocks had rallied for the last 2 1/2 years -- with the Dow hitting a four-year peak of 10,940.55 on March 4 -- as the economy grew briskly. After the economy expanded 4.4% last year, its best showing in five years, many analysts predicted that growth would slow a bit this year.

One reason: The Federal Reserve, concerned that the economy was heating up inflation, has been raising short-term interest rates since mid-2004. The higher rates, combined with high energy prices, have indeed helped brake the economy, many analysts say.

Continued strong economic data in January and February probably created unrealistically high expectations for full-year growth, said Richard D. Rippe, chief economist for Prudential Securities. The March numbers have been a cold shower, but that’s not necessarily a bad thing, he said.

“I’m not sure the markets want booming growth,” Rippe said. For one thing, the pause gives the Fed more flexibility to continue raising rates gradually or even take a break from rate hikes, he said.

In any case, Joseph LaVorgna, a senior economist at Deutsche Bank Securities Inc., said the recent “lousy” economic data struck him as merely “a pause that refreshes,” rather than a sign that the economy was poised to fall off a cliff.

“We’re still pretty bullish,” LaVorgna said.

Indeed, another bellwether company -- industrial conglomerate General Electric Co. -- reported an unexpectedly strong 25% gain in first-quarter profit Friday compared with the same period last year. Its stock rose 25 cents to $35.75 a share.

Corporate profits overall are estimated to have climbed 7% to 9% in the first quarter, down from their torrid double-digit growth last year but still a healthy advance, some analysts said.

“The economy is doing just fine, but the economic recovery is in its fourth year and it’s slowing down,” Goldman from A.G. Edwards said. “Yet investors are looking at everything as though the glass is half-empty.”

Positive signals seem to be ignored by investors hunting for data that confirm their pessimistic views, LaVorgna said. Another example is how Wall Street has largely ignored the drop in oil prices from record highs set two weeks ago.

Richard B. Hoey, chief economist at Dreyfus Corp., said that things seemed to be working out according to the Fed’s plan. Since the Fed started raising rates in June, he said, its goal has been to slow economic growth -- but not squelch it -- and keep inflation moderate.

Weaker consumer spending has spooked the stock market perhaps more than any other economic indicator, because such spending was a key factor in the economy’s recent growth, some analysts said.

John G. Lonski, chief economist at Moody’s Investors Service, said Wall Street would pay close attention to sales reports from big retail chains in the days ahead.

“It’s a little too early to state with confidence that consumer spending and retail sales are about to incur a jarring slowdown,” Lonski said.