Growing concerns that the crisis in US housing and mortgage markets is pushing the economy toward recession sent Wall Street on another wild ride yesterday as the Dow Jones industrial average plunged by as much as 340 points before recovering most of the losses in the final hour of trading.

In a day marked by panic selling, investors were whipsawed as stock indexes dove, rebounded, and dove again before clawing their way back to where they started. The Dow closed down 15.69 points, or 0.1 percent, at 12,845.78. The broader Standard & Poor’s 500 index eked out a 4.57, or 0.3 percent, gain to 1,411.27. The technology heavy Nasdaq Composite dipped 7.76, or 0.3 percent, to 2,451.07.

Yesterday’s decline extended the Dow’s losing streak to six consecutive sessions. The blue chip index has shed more than 1,000 points since hitting an all-time high of 14,000.41 on July 19, giving back most of its gains for the year. The Dow is now up only 3 percent for the year.

The S&P is down slightly for the year. The Nasdaq is up less than 1.5 percent.

Yesterday’s sell-off, following deep overnight declines in foreign financial markets, was sparked after Countrywide Financial Corp., the nation’s biggest mortgage lender, said it was so short on cash that it had to draw down its entire $11.5 billion line of credit. Countrywide has been unable to raise cash by selling bundles of mortgages to investors, who are reluctant to buy them in the wake of rising mortgage defaults.

Countrywide’s cash problems brought new fears of a broader credit crunch as spooked investors are avoiding risk. Business loans, car loans, and even credit card loans are bundled and sold to investors in global credit markets, which allows lenders to replenish their capital and make more loans.

But as investors stop buying the bundled loans, that means less capital, fewer loans, and higher rates. That could hurt consumer spending, slow business expansion and hiring, and weaken — if not derail — economic growth, economists said.

This threat to the economy led investors to sell broadly, not only dumping financial stocks, but also blue chips with no exposure to battered housing and mortgage markets. Exxon Mobil and Cisco Systems, for example, each fell about 4 percent during the day before recovering.

“The problem upon us is the credit crunch has become magnified very quickly,” said Brian Bethune, US economist at Global Insight, a Waltham forecasting firm. “This is a very dangerous escalation of the problem, which is why it has to be addressed more forcefully.”

The Federal Reserve, as well as central banks in other nations, have been pumping cash into the banking system, to insure that enough money is available to keep the financial system operating. Financial markets, meanwhile, are clamoring for the Fed cut its benchmark interest rate.

At its rate-setting meeting earlier this month, the Fed declined to cut rates, citing moderate economic growth and a risk of inflation. Many economists and analysts, however, expect the Fed will cut rates at least once before the end of the year. Fed policy makers meet again on Sept. 18.

Weaker economic data released yesterday added to the investor anxiety. Housing starts and permits fell sharply in July, manufacturing shows signs of slowing, and first-time claims for unemployment benefits rose last week, government agencies reported.

Stocks have experienced wild swings in recent weeks as investors try to gauge the extent of the mortgage and housing problems. Yesterday’s session wasn’t the first to see triple-digit swings in the course trading, and it’s unlikely to be the last, analysts said.

Even as the crisis in the credit markets has claimed mortgage companies and hedge funds in recent weeks, it remains unclear how many other funds and firms are exposed to risky mortgage investments, analysts said.

“Markets hate uncertainty,” said Jim Weiss, president of Weiss Capital Management in Concord. “When there’s an information vacuum, information is replaced by rumor, speculation, and worst-case scenarios.”

The uncertainty is leading investors to abandon riskier investments, said Jason Schenker, economist at Wachovia Corp. in Charlotte, N.C. He noted that selling yesterday was not restricted to stocks; prices for oil, gold, and other commodities also plunged.

“What’s going on here is risk aversion,” Schenker said. “It’s a mass exodus.”

Analysts said yesterday other factors likely contributed to the plunge in stock prices, including investors having to dump stocks and commodity contracts to cover their losses.

In addition, the market, which only moved higher during the past four years, was overdue for a major pullback. At the bottom of yesterday’s trading, major indexes were down 10 percent from their peak, considered the threshold of a market correction.

Many analysts say the correction is healthy for the market, and could set the stage for longer term growth.

“Right now, the market is very worried about the impact on the economy” of housing and mortgage woes, said Rob Lutts, chief investment officer at Cabot Money Management Inc. in Salem. “Our sense is this, too, will pass.”

Source:

http://www.boston.com/business/globe/articles/2007/08/17/markets_seesaw_as_anxieties_multiply/?page=2