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Pessimism Sends Stocks Sliding

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By JOE BEL BRUNO, The Associated Press

Published: November 2, 2007

NEW YORK - Wall Street plunged Thursday, pulling the Dow Jones industrial average down more than 360 points as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing economy.

Mindful of a warning from the Federal Reserve on Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking. The Fed, which cut interest rates a quarter point, said in a statement that inflation remains a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.

Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the United States grew in October at the weakest pace since March.

The combination of factors led investors to pull back sharply from Wednesday's rally, in which the Dow climbed 137 points after the Fed said the economy had weathered the summer's credit crisis.

"Wall Street is in love with the idea of a rate cut, and realized that the Fed said inflation is still a concern - that lowered the chances of a cut in December," said Ryan Detrick, a senior technical strategist with Schaeffer's Investment Research. "We're now feeling the pain now that investors have slept on it, and figured out what they said."

Little To Rally Over

Christopher Cordaro, chief investment officer at RegentAtlantic Capital, said Wall Street remains anxious about the possibility of recession. He also thinks the market is devoid of enough positive news "to have any type of sustained rally."

Investors were unswayed when the Fed pumped $41 billion into the U.S. financial system, one of its largest cash infusions since the credit crisis began in the summer. This increases the amount of money banks have to lend, and helps improve liquidity. In the past, such an action helped soothe the market, but that was not the case Thursday.

With the market growing pessimistic about the economy, the Labor Department's report on October jobs creation, scheduled to be released this morning, will take on more importance than usual. The data are expected to show unemployment remained steady in October, with payroll growth of 85,000 new jobs, compared with 110,000 new jobs in September.

The Dow fell 362.14, or 2.60 percent, to 13,567.87. The Standard & Poor's 500 index was off 40.94, or 2.64 percent, at 1,508.44, and the Nasdaq composite index dropped 64.29, or 2.25 percent, to 2,794.83.

Big late-session moves became common on Wall Street during the summer. Investors remain hopeful that a down market will turn around, but tend to launch a late afternoon sell-off if that doesn't happen.

'Mixed Signals'

"We've been getting all these mixed signals, and this is just a confluence of bad news between the Fed, the financials and this mixed earnings season," said Chris Johnson, president of Johnson Research Group.

Financial stocks were pummeled after Citigroup and Bank of America, the two biggest U.S. banks, were downgraded by CIBC World Markets on worries about credit markets.

Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note dropped to 4.35 percent from 4.47 percent late Wednesday, and was unchanged in after-hours trading.

Crude prices vaulted above $96 per barrel in overnight trading. A barrel of light sweet crude settled down $1.04 at $93.49 on the New York Mercantile Exchange.

The Commerce Department's report that consumer spending rose by 0.3 percent in September, slightly lower than the 0.4 percent increase that analysts expected, raised concerns about a slowing economy.

Also, the manufacturing sector's performance in October suggested trouble in the industrial sector. The Institute for Supply Management, a trade group, reported its manufacturing index registered 50.9, down from 52.0 in September and below expectations for 51.8. A reading above 50 indicates growth; below that spells contraction.

Also Thursday, the Labor Department said the number of people filing for unemployment benefits declined by a larger-than-expected 6,000 last week to total 327,000.

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