Investors flee as fear factor swamps markets worldwide

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There are times when Wall Street sees boogeymen around every corner. That pretty well describes today in the markets.

Stocks worldwide are being hammered even as oil and many other commodities slide again. The Dow Jones industrial average was down 286 points, or 2.5%, to 11,247 shortly after noon.

The only investments attracting buyers in a big way are government bonds -- the classic refuge. The yield on the 10-year U.S. Treasury note has tumbled to 3.63%, down from 3.70% on Wednesday and the lowest since April.

Fear is in excess supply today. Fear of what? Let’s run down the list:

--- Fear that the cash pinch on U.S. consumers is worsening, despite falling gasoline prices. The generally poor August sales reports from major U.S. retailers today confirmed the Federal Reserve’s report on Wednesday on U.S. regional economic trends, which mostly described conditions as ‘weak,’ ‘soft’ or ‘subdued.’

What’s more, the government’s report today that initial unemployment-benefit claims rose 15,000 to 444,000 last week sets the scene for the August employment data due Friday. Many analysts expect the report to show the economy lost jobs for an eighth straight month, which would further dim the outlook for consumer spending.

The jump in unemployment claims shows ‘the labor market remains in a recession-like situation,’ said economist Asha Bangalore at Northern Trust Co., in a report today.

--- Fear that things are worse in Europe than in the U.S. The European Central Bank today held its benchmark short-term interest rate at 4.25%, even though policymakers say they’re still worried about inflation pressures. The Bank of England also held its rate steady, at 5%. Given the deteriorating economic backdrop in Europe, central bank policymakers have little choice but to put inflation worries aside for now, many economists say.

In Germany -- Europe’s biggest economy -- new industrial orders tumbled 1.7% in July, the eighth straight drop, the government said today. The German stock market plunged 2.9%, leading a broad decline in shares across the region. In Britain last weekend, the finance minister, Alistair Darling, said the country’s economic woes would be ‘more profound and long-lasting than people thought.’

‘People are getting nervous about a real global slowdown,’ said Scott Gewirtz, head of Treasury bond trading at Lehman Bros. in New York. That is driving more investors into government bonds here and in Europe.

--- Fear that struggling economies in the developed world will drag down the developing world as well. Bad as the U.S. stock market has fared over the last four sessions, it’s still above its mid-July lows. By contrast, Brazil’s main stock index has sunk to a 52-week low today, and has plummeted almost 30% since late May. China’s Shanghai composite stock index also hit a new 52-week low on Wednesday.

--- Fear of more financial-sector fallout from the credit crunch. Jitters about the health of banks, brokerages and hedge funds had eased a bit in August, but they’ve come back to the fore today. Financial stocks are leading the market lower in this sell-off, thanks in part to an ominous new commentary from Pimco bond-market guru Bill Gross.

--- Fear that there’s just no good reason to stay in stocks in the near term. Given the rising risks to the global economy and the ongoing credit crunch, ‘it just feels like people want out of the market,’ said Dan McMahon, a trader at Raymond James & Associates.

What’s more, veteran investors know that September historically has been the worst month of the year for the stock market. So the feeling, McMahon said, is why fight it?

‘ ‘Sell the rallies’ is the mantra,’ he said. ‘You tell me -- why would you want to buy something now?’