Markets Reverse a Rally on Signs of Long Slump

Caution returned to Wall Street on Thursday as unemployment claims reached a record high and new home sales hit a record low — two glaring signs that the economy was still in a deep slump.

The major stock indexes gave back all of Wednesday’s gains, and then some.

The Dow Jones industrial average sank 226.44 points, or 2.7 percent, to 8,149.01. The Standard & Poor’s 500-stock index fell 3.3 percent, or 28.95 points, to 845.14. The Nasdaq also dropped more than 3 percent, to close at 1,507.84. Stocks had soared Wednesday on hopes that the government would take bad debt off banks’ books.

Investors took a step back Thursday after getting some harsh reminders that it might be a while before the recession, already in its 14th month, ended.

The Labor Department said the number of people continuing to receive unemployment benefits reached a seasonally adjusted 4.78 million the week that ended Jan. 17, the highest level on records that go back to 1967. As a proportion of the work force, that was the highest level since August 1983.

Companies across a variety of industries have been slashing their payrolls by the thousands.

Eastman Kodak said it would cut 3,500 to 4,500 jobs after weak sales. Its shares fell $2.08, or 29 percent, to $4.99, after it reported a $137 million fourth-quarter loss on a big drop in sales of both digital and film-based photography products.

After the markets closed on Wednesday, Allstate reported a loss of $1.13 billion for the fourth quarter and said it would cut 1,000 jobs. On Thursday, shares of Allstate fell $6.14, or 20.7 percent, to $23.50.

“It seems like we’ve gotten through the financial crisis. Now we’re dealing with global synchronized recession,” said Brian Battle, vice president for trading at Performance Trust Capital Partners in Chicago.

As more people lose their jobs, fewer of them are buying new homes. The Commerce Department said home sales plunged 14.7 percent to an adjusted annual rate of 331,000 in December.

Earlier this week, the National Association of Realtors said existing home sales posted an unexpected increase last month, but the sales were mostly of foreclosed homes.

“This all began as a housing crisis, and clearly, the housing crisis continues,” said Nathan Rowader, director of investments at Forward Management. “Bad housing numbers are not going to encourage anyone to be buying stock.”

The Commerce Department also said orders to factories for big-ticket manufactured goods fell for the fifth consecutive month in December.

Still, some in all fourth-quarter results were positive. Colgate-Palmolive said its earnings rose nearly 20 percent, partly as a result of higher prices and new products. Shares of Colgate-Palmolive rose $1.37, or 2.2 percent, to $65.22.

Many corporate results, however, were grim.

Qualcomm fell $1.69, or 4.6 percent, to $35.13 after reporting a steep drop in its earnings and slashing its forecast. The company, one of the world’s largest suppliers of chips for mobile phones, has seen demand fall as customers trim inventories.

The number of stocks falling outpaced advancers by 5 to 1 on the New York Stock Exchange. Trading volume came to 1.44 billion shares.

The dollar was mixed against other major currencies, while gold prices rose.

Bond prices sank Thursday. The Treasury’s 10-year note fell 1 23/32, to 107 18/32. The yield, which moves in the opposite direction from the price, rose to 2.86 percent from 2.67 percent late Wednesday.

In trading early Friday in Asia, stocks fell for the first day in four after the government reported a decline in factory output.