Stocks can't shake the blues

NEW YORK (CNNMoney.com) -- Stocks slumped Friday, but managed to end off session lows, as Wall Street joined a worldwide market slump on bets that a recession is imminent - if not already under way.

The Dow Jones industrial average (INDU) fell 312 points or 3.6%. The Dow slumped as much as 504 points in the morning, recovered to within 112 points of breakeven and then fell back again by the close.

The Standard & Poor's 500 (SPX) index fell 3.5% and the Nasdaq composite (COMP) slid 3.2%. Both stock gauges had posted steeper declines in the morning.

Friday's session capped off a tough week on Wall Street near the end of a brutal month. The ongoing credit crisis, sluggish profit forecasts and falling commodity prices have all amplified recession fears, and the weakness hasn't been limited to the United States.

For the week, the Dow lost 5.3%, the S&P 500 lost 6.8% and the Nasdaq fell 9.3%. With one week left in October, the major gauges are down between 25% and 30% for the month. The major gauges are down more than 40% since the Dow and S&P 500 hit all-time highs a year ago and the Nasdaq hit a bull-market high. All three major gauges are at more than five-year lows. Investor panic is at record levels, as measured by the CBOE Volatility index, or the VIX.

Some analysts think that the market is nearing a so-called bottom, but no one is willing to call it and jump back in yet, said Jim Dunigan, chief investment officer at PNC Wealth Management.

"In the short-term, everything argues against any significant spike up in stocks," he said.

Dunigan said that longer-term the outlook is better, as inflationary pressures continue to dwindle, some stocks become good values relative to earnings and the economy eventually recovers.

The main questions for investors right now are about "the duration and severity of the current recession and how long this vicious forced selling will continue," said Michael Sheldon, chief market strategist at RDM Financial Group.

That so-called "forced selling" due to margin calls has played a big role in the recent volatility. With a margin call an investor has to either pay back a loan or put more money into an account because a security purchased with borrowed money has fallen to a certain level.

One fast way to raise the cash is to sell something else, such as stock.

Global market effect: Asian markets tumbled overnight, with the Japanese Nikkei losing almost 10%. The Moscow market slumped 14% before the exchange said it was suspending trading until Tuesday.

European markets retreated, with the London FTSE falling 5% after a big drop in the United Kingdom's third-quarter GDP added to recession bets there. (Full story)

"The main culprits that are likely responsible for the selling today (Friday) include weak economic growth in the U.K. and possible forced liquidation by hedge funds and other investors," Sheldon said.

Bets that the Bank of England and European Central Bank will have to cut rates aggressively in the months ahead sent the euro and pound lower versus the dollar. The dollar slumped versus the yen. (Full story)

The U.S. central bank is expected to cut rates when it meets next week. But experts are wondering if the Federal Reserve will lower rates to below 1% for the first time. (Full story)

Oil prices continued to slide, with crude plunging to a 17-month low below $65 a barrel despite news that oil cartel OPEC is cutting production by 1.5 million barrels a day starting in November.

The decline is basically the oil market "forecasting a recession," said Terry Morris, senior equity manager at National Penn Investors Trust.

Jittery markets: Investors were braced for an even bigger selloff in the early going after Dow Jones industrial average futures fell 548 points - which triggered trading limits.

The nervous environment prompted the New York Stock Exchange to post a statement on its blog confirming that trading would began as normal at 9:30 a.m. ET.

Reflecting the jitters, the CBOE Volatility (VIX) index, or the VIX, briefly hit an all-time high of 89.53. But the VIX had improved to 79.47 in the late afternoon.

Clearly, there is a lot of nervousness out there, said Joseph Saluzzi, co-head of equity trading at Themis Trading. However, it wasn't clear what created so much more nervousness early Friday versus any other day this week.

Partly it was the U.K. GDP report, he said, which was adding to the reality of how global the problems are. "Usually, Europe is reacting to us, but today we're reacting to them."

On a positive note, a report showed sales of existing homes jumped more than expected in September, with investors taking advantage of lower prices. The report also showed that prices continue to fall.

Oil, gas and gold: U.S. light crude oil for December delivery settled down $3.69 at $64.15 a barrel, a 16-month low.

Prices have been sliding since crude peaked at a record $147.27 a barrel on July 11. The decline since then has resulted from speculators pulling out of the market on bets that demand is slowing along with the global economy.

Gasoline prices fell another 4.1 cents overnight, to a national average of $2.781 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 37th consecutive day that prices have decreased. During that time, prices have fallen by over $1 a gallon.

COMEX gold for December delivery rallied $15.60 to settle at $730.30 an ounce.

Company news: This week has brought the biggest wave yet of third-quarter corporate results. About 140 of the S&P 500 companies have reported.

With 41% of the reports out already, profits are on track to have fallen almost 11% from a year earlier, according to the latest estimates from Thomson Reuters.

After the close Thursday, Microsoft (MSFT, Fortune 500) reported quarterly sales and earnings that topped forecasts. But the software leader also warned that sales and earnings for the fiscal second quarter and the full year won't meet forecasts due to the slowing economy. Shares ended with small declines. (Full story)

In other news, PNC (PNC, Fortune 500) is buying fellow regional bank National City (NCC, Fortune 500) in a $5.6 billion deal. National City's shares have been hammered over the last few months amid questions about its solvency following a series of bank failures and mergers.

Privately owned Chrysler said it will cut 25% of its salaried workforce starting next month, and that it could announce other restructuring news in the future amid the auto industry slump.

Market breadth was negative. On the New York Stock Exchange, losers topped winners 4 to 1 on volume of 1.58 billion shares. On the Nasdaq, decliners beat advancers 3 to 1 on volume of 2.7 billion shares.

Credit market: Lending rates seized up a bit amid the broad recession fears. (Full story)

Libor, the overnight bank-to-bank lending rate, rose to 1.28% from 1.21% late Thursday, according to Bloomberg.com. However, that still kept the rate below the Fed's benchmark lending rate of 1.5%, which is a good sign for the credit market. Libor hit a record 6.88% earlier this month at the height of the market panic.

The 3-month Libor rate, what banks charge each other to borrow for three months, fell to 3.52% from 3.54% Thursday.

The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, widened to 2.70% from 2.55% late Wednesday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.

Lending rates had been improving for more than a week, but have stalled over the last couple of days.

Credit froze in the wake of the housing market collapse, subprime fallout and contraction in the bank sector. The lack of available credit has punished the already weak economy, making it hard for businesses to function on a daily basis and for consumers to get loans.

Treasury prices turned lower, erasing morning gains. The decline boosted the yield on the 10-year note to 3.68% from 3.64% Thursday. Treasury prices and yields move in opposite directions. At one point, the yield on the 30-year bond sank to the lowest point in its 31-year trading history, to as low as 3.87%.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, slipped to 0.86% from 0.95% late Thursday, showing investors would rather see little return on their money than risk the stock market.

Last week, the 3-month fell to below 0.2%. Last month, it reached a 68-year low around 0%, as investor panic hit its peak.