Dow, S&P continue to skid

Stocks on Wall Street and across Europe fell sharply Thursday as fears of a double-dip recession continued to grow.

The Dow Jones Industrial Average, which has suffered heavy losses in recent weeks, fell 419 points, or 3.68 percent, to 10,990.58, as investors were hit by a new Morgan Stanley report suggesting that both Europe and the United States could be headed for a second recession over the next year, after the sharp downturn of 2008-2009.

The Standard & Poor’s 500 index also suffered big losses, dropping 53.24 points, or 4.5 percent, to 1,140.65. The Nasdaq composite index lost 131.05 points, or 5.2 percent, falling to 2,2380.43.

Traders also cited the impact of a new survey by the Philadelphia Federal Reserve Bank, which unexpectedly reported that Mid-Atlantic manufacturing contracted sharply in August, raising worries about third-quarter economic activity.

The Philadelphia Fed’s index of general business activity for August fell to its lowest point since March 2009, when the U.S. was in recession.

At one point early in the session, the Dow was off more than 500 points. The losses on Wall Street came after stock markets across Asia and Europe had signaled a tough trading day was in store.

In Europe, London’s FTSE 100 index of leading companies was down 4.49 percent at 5,092.23. In Frankfurt, the main DAX index plunged 5.82 percent to 5,602.80, and in Paris the CAC 40 tumbled 5.48 percent to 3,076.04. The loss in London was the biggest one-day fall since March 2009.

In recent weeks, investors also have been blitzed with a few “shocks to confidence,” said David Eisenberg, principal at Mercer Investment Consulting, such as the U.S. debt-ceiling debate and the eventual downgrade of the country’s credit rating. Those concerns are “spooking the market,” he said.

He acknowledges the economy has disappointed lately.

“Now, it’s looking at best like it’s going to continue to be an anemic recovery,” he said. “The disappointment is that with all the stimulus, the recovery never strengthened and currently looks like it’s weakening.”

Still, he thinks the chances of a double-dip recession are “pretty small.” But he doesn’t expect things to pick up until next year.

“I actually think we will muddle along, work through it, and eventually start to grow again,” he said.

One reason growth is slowing down is because companies and consumers are both holding onto their money, he said. The good news is that they have saved quite a bit of money and should start unloading it on the economy in 2012.

“Corporate cash flows in the U.S. are actually very, very healthy,” he said. “Households have been saving a lot, too. That cash doesn’t sit on the balance sheet forever.”

Morgan Stanley wasn’t as optimistic with its report on the economy. The company warned that both the U.S. and Europe are “hovering dangerously close to a recession.”

“It won’t take much in the form of additional shocks to tip the balance,” the report said.

Morgan Stanley lowered its global growth forecasts for this year to 3.9 percent from 4.2 percent in 2011, and to 3.8 percent from 4.5 percent in 2012.

They blame the downgrade — and the next possible recession — on recent “policy errors” in the U.S. and Europe.

“This is eroding business and consumer confidence and has weighed down on financial markets,” the report said.

It has led safety-seeking investors to push the price of gold to another record high of nearly $1,830 an ounce, although it hasn’t yet reached its inflation-adjusted peak seen in the 1980s.

Even the U.S. dollar and yen saw gains in comparison with the euro, which was down 0.6 percent to $1.43.

Mr. Eisenberg wonders whether these fears will continue push investors to switch to neutral investments such as money markets and government bonds that won’t gain or lose much money.

“So the question for the investor: ’Am I so worried about the future that I’m going to make investments that I know earn less for me than the rate of inflation?’” he said.