The Dow Jones industrial average (INDU) lost 680 points, its fourth-biggest single-session decline on a point basis ever. The decline was 7.7% in percentage terms - the 12th worst percentage one-day decline ever.

Year-to-date, the Dow is down 38.6% and has lost 42.5% from its record close of 14164.53 hit on Oct. 9, 2007.

The Standard & Poor's 500 (SPX) index fell 8.9% and the Nasdaq composite (COMP) gave up 9%.

Treasury prices rallied, lowering the corresponding yields. Oil and gold prices plunged. The dollar tumbled versus the yen and gained against the euro.

Stocks slid throughout the morning as investors sorted through Black Friday sales reports and weak readings on manufacturing in the United States and abroad.

But the selling accelerated in the afternoon after the National Bureau of Economic Research (NBER) confirmed what many have long believed - that the nation is in a recession. According to the NBER, the official body that calls economic cycles, the U.S. has been in a recession since December 2007.

"The economy stinks, the manufacturing report didn't come out well, and the announcement from the NBER didn't help," said Ram Kolluri, president at Global Investment Management.

"There's a real nervousness about the economy," he added.

The market was already primed for a selloff after last week's run, analysts said. After hitting multi-year lows a little over a week ago, the S&P 500 rallied 19% through last Friday, while the Dow and Nasdaq both gained just under 17%.

"We're going to continue to see this extreme volatility because there's no clear end in sight to all the crises," said Dean Barber, president at Barber Financial Group.

Speaking in the afternoon, Federal Reserve Chairman Ben Bernanke said that the economic weakness will continue for some time, despite the impact of the government's efforts to get money flowing again.

Treasury Secretary Henry Paulson, speaking at a Fortune 500 forum in the afternoon, said the downturn was significant. He also said that the federal government is looking to expand the financial rescue program.

Last week's gains followed the announcement of President-elect Barack Obama's economic team and Citigroup's bailout. Positive reports on Black Friday also helped stocks at the end of last week. But market experts expect the critical holiday-shopping period to be tepid.

Economy: The Institute for Supply Management said its November manufacturing index fell to a 26-year low of 36.2 from 38.9 in October. That was worse than what economists were expecting, according to a survey from Briefing.com.

October construction spending fell 1.2% versus a flat reading in the previous month. Economists thought spending would drop 1%.

Global economic news was pretty grim as well, with manufacturing surveys in Britain and the euro zone showing a steep slowdown. A reading on China's manufacturing survey was equally worrisome.

Asian markets ended in mixed territory and European markets ended lower.

Retail sales: Shoppers came out in droves over the weekend, motivated by pent-up demand and deep discounts, but the surge is not expected to last.

Including "Black Friday," the day after Thanksgiving, shoppers spent $41 billion in the four-day holiday weekend, according to the National Retail Federation (NRF), an industry trade group. The average shopper spent $372.57, up 7.2% from a year ago.

However, overall 2008 holiday spending is expected to rise just 2.2% from a year ago, the smallest gain in six years.

Thursday's November retail sales reports from the nation's chain stores will be critical, as they include the four-day holiday weekend, said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

"If they don't report a lift up in same-store sales, even with Black Friday included, that's going to be a big negative for the (stock) market," Rovelli said.

Same-store sales is an industry metric that refers to sales at stores open a year or more.

Early reports suggest "Cyber Monday" online shopping sales are on track to be flat or slightly higher versus a year ago.

Consumer spending drives two-thirds of economic growth, and the pullback has exacerbated the economic slowdown.

Obama: The president-elect announced his national security team. As expected, Sen. Hillary Clinton, D-N.Y., was nominated Secretary of State and current Defense Secretary Robert Gates was asked to stay on. Retired Marine Gen. James Jones was nominated as national security adviser, Eric Holder was picked for Attorney General and Arizona Gov. Janet Napolitano was the choice for Secretary of Homeland Security. (Full story)

Automakers: GM (GM, Fortune 500) and Ford (F, Fortune 500) gained last week on growing bets that they, along with Chrysler, will receive a government bailout. But the stocks tumbled Monday in tune with the broader market.

The auto industry's first pitch to Congress was rebuffed, but there is increased speculation that its second pitch will be more successful.

The companies have until Tuesday to submit proposals for how they would use $25 billion in taxpayer money to make their companies "viable." The Senate Banking Committee is scheduled to host a hearing Thursday, while the House Financial Services Committee is holding a hearing Friday.

Other movers: JPMorgan Chase, which bought collapsed bank Washington Mutual earlier this fall, said it will cut 9,200 WaMu jobs, or around 20% of the company's workforce. JPMorgan (JPM, Fortune 500) shares fell 17.8%.

Johnson & Johnson (JNJ, Fortune 500) said it will buy breast implant maker Mentor (MNT) for $1.07 billion, or $31 a share, nearly double the company's closing price from Friday. Dow stock J&J fell 5.6%, while Mentor gained 89%.

Stock declines were broad based, with all 30 Dow components falling, led by financial components American Express (AXP, Fortune 500), Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500).

Other financial stocks tumbled too. Goldman Sachs (GS, Fortune 500) lost almost 17% after analysts said the company is likely to post a bigger quarterly loss in the fourth quarter than previously thought.

All but two of the S&P 500 stocks ended lower. The two gainers were Rohm and Hass (ROH, Fortune 500) and AutoNation (AN, Fortune 500).

Market breadth was negative. On the New York Stock Exchange, losers beat winners by 7 to 1 on volume of 1.6 billion shares. On the Nasdaq, decliners topped advancers by five to one on volume of 1.99 billion shares.

Other markets: The dollar gained versus the euro but fell against the yen.

U.S. light crude oil for January delivery fell $5.15 to settle at $49.28 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $42.20 to settle at $776.80 an ounce.

Gasoline prices continued the fall to nearly four-year lows, with prices down half a cent to a national average of $1.82 a gallon, according to a survey of credit-card swipes released Monday by motorist group AAA. Prices have been sliding for more than two months, losing over $2 a gallon or 53%.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 2.72% from 2.92% Friday. Last month, the 2-year, 10-year and 30-year government bonds all hit their lowest levels since the Federal Reserve started keeping records in 1962.

The yield on the 3-month Treasury bill improved to 0.03% from 0.02% Friday, but still not far from 68-year lows of zero hit last month. The 3-month is seen as the safest place to put money in the short term. A low yield means wary investors would rather preserve cash despite earning little or no interest on it than risk the stock market.

Lending rates were mixed. The 3-month Libor rate held steady at 2.22%, unchanged from Friday, while overnight Libor fell to 1.09% from 1.16% Friday, according to Bloomberg. Libor is a key bank lending rate. 

NEW YORK (CNNMoney.com) -- Automakers are counting on a rebound in demand by 2010. But that could turn out to be unrealistic because of an "auto bubble" the Big Three helped to create during the past few years.

Cheap financing, easy credit conditions and attractive pricing on cars due to overcapacity in the U.S. auto market caused record sales earlier this decade.

Experts agree those three conditions are going to be missing for years to come, and that sales will continue to be weaker than normal at least through 2011 or 2012.

And that may make it a lot tougher for executives of General Motors, Ford Motor and Chrysler LLC to make the case that they have a viable turnaround plan when they again appeal to Washington for $25 billion in bridge loans later this week. The Big Three will present their business plans to Congress on Tuesday, and appear before a Senate committee Wednesday and a House panel Friday.

"It's going to take us many years to get back to a trend level of sales, let alone the levels you might hope to see," said Bob Schnorbus, chief economist with J.D. Power & Associates.

From 1999 through 2006, U.S. auto sales averaged 16.9 million vehicles a year. Before that period, there was only one year when annual sales even hit 16 million.

And these strong years came at a time when the number of licensed drivers was posting a modest 1.1% annual gain, suggesting that the sales increases were way ahead of fundamentals. In other words, people bought new cars or trucks because they could, not because they necessarily needed to.

"We had above-trend years, some of which was caused by an incredible growth in household net wealth that later we found wasn't real," said George Pipas, director of sales analysis and reporting for Ford Motor.

Pipas added that sales were "artificially high" in other years "due to a higher and higher level of incentive spending.".

"Now when we look back, we see elements of a bubble," he said. "Does that present a problem today? Of course."

The bubble-inspired mistakes

The fact that sales were that strong for that long led the automakers to make mistakes about their production capacity that they are now paying for dearly.

The strong sales also allowed General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler LLC to generate healthy profits, which led them to agree to contracts with the United Auto Workers union that they ultimately couldn't afford over the long-haul.

But as import brands started to eat into Detroit's market share, it became tougher for the Big Three to stay profitable. By 2005, GM and Ford were losing money on their North American auto operations. Chrysler joined them losing money a year later.

In response, they all closed factories and cut staff to bring their capacity more in line with demand. But they didn't cut deeply enough.

Each of the Big Three is now making additional cuts in capacity, especially for sport/utility vehicles and other light trucks. That is a sign that these companies did not accurately predict how sharply demand could fall once the auto bubble burst.

Detroit wasn't alone in making this mistake. Toyota Motor (TM) and other Asian and European automakers increased their U.S. capacity earlier this decade as well.

Toyota has since had to cut its sales and profit outlook because of the weakness in the U.S. It and other Asian automakers have also been forced to rely on bigger cash-back offers and other profit-sapping incentives to boost sales.

J.D. Power believes that U.S. sales won't again reach the 16 million vehicle level until 2012 at the earliest. And Schnorbus said he isn't confident that sales will reach that target by then.

This is an astonishing fact when you consider that many in the industry had previously thought 16 million in annual sales was a sign of relatively low demand until the current collapse in sales.

Even GM CEO Rick Wagoner conceded in testimony to Congress recently that the level of auto sales reached during the boom years are probably out of reach for the foreseeable future.

"We think that was actually, probably, in retrospect, higher than a normal trend because of the low energy cost and the cheap credit," Wagoner said.

Pop goes the market

Another sign of just how out of whack the market got by the middle of the decade was that there were far more many vehicles on the road than actual registered drivers.

This has long been the case, due mainly to the number of cars and trucks owned by businesses. But that gap grew much wider during the boom years. In 1998, there were about 12 million more vehicles than drivers in 1998. By 2006, the difference grew to 34 million..

That kind of imbalance couldn't be maintained, even before the economy fell off a cliff. To that end, U.S. sales slowed to 16.1 million in 2007 and have plunged this year thanks to high gas prices earlier in the year and then the credit crunch.

Sales are now at their worst levels in 25 years, with a seasonally-adjusted annual rate of only 10.5 million vehicles in October. And when adjusted for population, GM said October was the worst month for the industry since the end of World War II.

November sales, which will be announced on Tuesday, are likely to be comparable to October's total. For the full year, sales are expected to be just over 13 million and the automakers themselves are forecasting a drop to around 12 million in 2009.

But the Big Three is hoping sales will start to bounce back in 2010 thanks to pent-up demand. They argue that this rebound, combined with additional cost cuts and labor contract savings they'll see that year, will get back on their feet financially.

David Cole, chairman of the Center for Automotive Research, a Michigan think tank supportive of the bailout, said he still believes that sales can bounce back quickly because they've fallen so dramatically during this downturn.

"Right now we're at depression level sales. Sales of 14 million a year is what we'd expect for recession levels," he said.

But he agrees that the bubble that occurred during the boom is a big reason why Detroit is in such serious trouble. Now that it has burst, there is no easy way out of the crisis for the Big Three.

"We had easy credit so we had inflated sales for several years," he said. "That's part of the price being paid right now." 

"What would be more significant would be if stocks react positively [this] week in spite of bad news from the retailers," noted John Merrill, chief investment officer at Tanglewood Capital Management. "That would suggest that the market is starting to look forward."

Stocks managed gains in last week's holiday-shortened week, with all three major gauges rising after 3 straight weeks of declines.

The week ended with "Black Friday," the traditional kickoff to the holiday shopping season. Investors are expecting dismal retail sales as the weak economy continues weighing on household budgets.

Sales are going to be "really bad," predicted Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York. "The consensus is that parents will buy presents for their kids but not for each other."

But first results Saturday from retail research firm ShopperTrak RCT indicated a 3% gain in Black Friday sales from a year ago, although there was some concern about whether the sales could be sustained.

In addition, investors will be keeping an eye on a slew of economic reports, including readings on manufacturing, construction, factory orders and the labor market.

Thursday's weekly jobless claims report is "the only thing that matters [and] it's going to be a horror show," Rovelli said.

The jobs picture could get even darker on Friday when the government's closely watched monthly jobs report comes out. The unemployment rate is expected to climb to 6.8% from 6.5%.

Automakers will also be in focus amid growing bets that the industry will receive a government bailout after all. GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler's pleas were rebuffed earlier this month, but the group will appeal to Congress a second time this week.

Over the past five days, the Dow gained nearly 10%, the S&P 500 surged 12% and the Nasdaq rose almost 11%. The Dow's winning streak marked the first time the blue-chip index held gains for five days in a row since November 2007.

Stocks had rallied last week as President-elect Barack Obama announced his economic team, and the government unveiled a plan to pump $800 billion into the economy to get banks to lend to consumers and small businesses.

The gains were a strong end to a brutal month. In November, the Dow lost 5%, the S&P 500 lost 7% and the Nasdaq lost 11%.

Monday: The Institute for Supply Management (ISM) releases what is expected to be a grim report on manufacturing in the morning. November ISM is expected to fall to a 26-year low of 38, according to a consensus of economists surveyed by Briefing.com, versus a reading of 38.9 in October.

Construction spending likely fell in October, with economists expecting the government report to decline by 0.9% after it fell by 0.3% in September.

Also on Monday, Treasury Secretary Henry Paulson will give a speech on the markets and economy at the Fortune 500 forum in Washington.

Federal Reserve Chairman Ben Bernanke is also speaking Monday. He will be in Texas, talking about the Fed's policies in the financial crisis at the meeting of the Greater Austin Chamber of Commerce.

Tuesday: The automakers have until Tuesday to submit proposals for how they would use $25 billion in taxpayer money to make their companies "viable."

The House Financial Services Committee holds a hearing next Friday on the proposals and the Senate Banking Committee is expected to hold a hearing sometime during the week too.

Separately Tuesday, monthly auto and truck sales figures for November will be released during the normal trading session. October auto sales were the weakest in 25 years. (Full story)

Wednesday: The ISM releases its report on the services sector of the economy. The November services sector index is expected to fall to 42.6 from 44.4 in October.

Payroll services firm ADP releases its report on private sector employment in November, ahead of the big national report Friday. Employers are expected to have cut 173,000 jobs from their payrolls after cutting 157,000 jobs in October.

Also, the revised reading on third-quarter productivity is due in the morning, while the Fed's "Beige Book" reading on the economy is due in the afternoon.

Thursday: Factory orders are expected to have fallen 2.7% in October, when the government releases its report in the morning. Orders fell 2.5% in September.

The weekly jobless claims report is due in the morning, as well as November sales from the nation's retailers. October sales were disastrous as retailers continue to struggle with attracting consumers in an economic downturn. (Full story)

Also, before the market opens, luxury homebuilder Toll Brothers Inc. (TOL, Fortune 500) is slated to release its quarterly financial report. Toll gave a glimpse into its state of affairs in early November, when it said revenue dropped 41% but also noted it had enough cash on hand to weather the turmoil.

Bernanke is scheduled to speak about housing and housing finance in Washington, D.C., at the President's Conference on Homeownership and Mortgage Initiative.

Friday: The November jobs report is released in the morning. Employers are expected to have cut 300,000 jobs from their payrolls after cutting 240,000 in the previous month. The unemployment rate, generated by a separate survey, is expected to have risen to 6.8% from 6.5% in the previous month.