Stocks fall as global fears rise

Hopes that financial markets had shaken off fears of a “double dip” recession were dashed Tuesday as fresh economic worries worldwide sent stocks plummeting.

In a day painfully reminiscent of Wall Street’s furious sell-offs in May -- a month investors would rather forget -- the Dow Jones industrial average tumbled 268.22 points, or 2.6%, to 9,870.30.

Broader share indexes suffered deeper losses, and some closed below their lowest levels of the spring decline. That was a blow to stock bulls who figured that the market’s drop had run its course by early June.

For investors, “It’s all about the double dip,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J. “The concern is that the fledgling, fragile economic recovery is going to backtrack and we’re going to be back into the soup.”

Many analysts insist that the risk of a new economic downturn is low. With the calendar at the midyear point, some of the selling may have been fueled by end-of-quarter portfolio shifts by big investors, traders said.

Some investors ran for the classic havens of U.S. Treasury bonds and gold. The 10-year T-note yield slid to 2.96%, down from 3.03% on Monday and the lowest since April 2009.

Gold futures in New York rose $3.80 to $1,242 an ounce even as most commodities slumped.

Stocks’ losses cascaded around the globe Tuesday, beginning in Asia, where shares were hit after an index of leading indicators for the Chinese economy was revised to show only a small gain in April, and the smallest rise in five months. In Shanghai the main stock market index plunged 4.3% to a 14-month low.

“China’s really been the counterbalance to the global gloom and doom,” said Peter Kenney, a trader at Knight Capital Group in New Jersey. “When that’s not working, then everything looks a lot less rosy.”

Although the Chinese economy is expected to continue expanding, a significant slowdown could hurt the rest of the planet because the Asian giant has been a major driver of global growth.

In Europe, stocks tumbled on new jitters over the health of the continent’s banking system. Europe’s worsening debt crisis was the trigger for global markets’ plunge in May.

On Thursday the European Central Bank is expecting repayment of about $540 billion of one-year loans it previously extended to commercial banks as part of the ECB’s efforts to support the banking system in the aftermath of the 2008 credit crisis.

In place of the one-year loans the ECB is offering the banks new three-month loans, and policymakers are expected to announce Wednesday how much the banks have asked for. Investors worry that banks’ demand for new loans will be enormous, a sign that many financial institutions can’t get short-term funding from other banks and must continue to rely on the ECB as the lender of last resort.

Concern about the banks helped send European stock markets sharply lower. Shares sank 5.5% in Spain, 4% in France and 3.3% in Germany.

Market losses in Asia and Europe drove Wall Street lower at the opening bell. U.S. stocks then suffered another hit after an index of consumer confidence in June came in far below expectations, suggesting that Americans were losing faith in the economy.

The Conference Board research group said its confidence index for June dropped almost 10 points to 52.9, down from a revised 62.7 in May. Although the index has mostly been treading water for the last 12 months, investors weren’t prepared for such a steep decline from May’s level, analysts said.

That was more fodder for market bears who believe that the economic recovery is fading fast.

“Anybody with half a brain over the past two months sees the economy is rolling over,” said Bill King, chief strategist at M. Ramsey King Securities in Burr Ridge, Ill. “You see it in housing. You see it in jobs. Now you’re seeing it in consumer confidence.”

Many experts, however, say that although some data suggest economic growth has slowed in recent months, spending by businesses and consumers hasn’t fallen off a cliff. The government said Monday that U.S. personal spending rose 0.2% in May from April -- tepid growth but better than expected.

An index of weekly retail sales shows that sales this month at major chains have been up 2.5% to 3% from a year earlier.

Consumers may not sound upbeat in confidence surveys, but “the underlying data suggest they haven’t locked themselves in their homes and are refusing to spend,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn.

Still, he said, the risk is that another dive in financial markets, after May’s wild volatility, could cause consumers and businesses to close their wallets. A double dip “has the potential to become a self-fulfilling prophecy,” he said.

A crucial gauge of the economy’s health is due Friday: the government’s report on June employment. The May report showed that the private sector added just 41,000 net jobs that month. Analysts expect a gain of about 110,000 private-sector jobs in June.

For Wall Street, the immediate concern is that some major market indexes on Tuesday fell through their nadirs of early June -- levels that the bulls had expected to mark the bottom of this quarter’s pullback.

The Standard & Poor’s 500 index tumbled 33.33 points, or 3.1%, to 1,041.24, its lowest finish since Oct. 31. That was below the spring closing low of 1,050.47 reached June 7, and left the index down 14.5% from its spring peak of 1,217 reached April 23.

The Nasdaq composite index also fell through its previous low, diving 85.47 points, or 3.9%, to 2,135.18. The spring closing low was 2,158 on June 9.

The declines in nearly all of the major indexes from their spring highs still are in the range of a classic market “correction,” or short-term pullback, within a bull market. Wall Street considers a drop of 10% to 20% in major indexes to be a correction. A decline beyond 20% is considered the start of a new bear market.

Of course, you never know until after the fact whether a correction is just the first leg down in a new bear market. That, once again, is the agonizing question for investors.

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Times staff writer Nathaniel Popper in New York contributed to this report.