Sept. 22 (Bloomberg) -- U.S. stocks slumped, giving the Dow Jones Industrial Average its biggest two-day decline since December 2008, amid investors' concern that policy makers are running out of tools to avoid another global economic recession.

All 10 industries in the Standard & Poor's 500 Index retreated at least 1.8 percent as losses were led by commodity and industrial shares. Alcoa Inc., Caterpillar Inc. and Bank of America Corp. dropped more than 5 percent, pacing declines in companies most-tied to economic growth. FedEx Corp., operator of the biggest cargo airline and a proxy for the economy, tumbled 8.2 percent after cutting its profit forecast.

The S&P 500 fell 3.2 percent to 1,129.56 at 4 p.m. New York time, dropping 7.1 percent in four days. The Dow lost 391.01 points, or 3.5 percent, to 10,733.83, bringing its two-day retreat to 5.9 percent. More than 13.2 billion shares changed hands on U.S. exchanges at 4:47 p.m., 54 percent more than the three-month average, according to Bloomberg data.

“People are selling first and asking questions later,” David Kelly, chief market strategist for JPMorgan Funds in New York, said in a telephone interview. “The problem is that policy makers seem to have no clue what the solutions are. The Fed needs to express confidence on the economy itself. I don't know how much further the market can go down.”

The MSCI All-Country World Index slid 4.5 percent, extending a drop from its May 2 high to more than 20 percent, entering a bear market. The S&P 500 has fallen 17 percent since April 29 amid concern about a global economic slowdown. Benchmark indexes for the U.S., U.K., Canada, Singapore and New Zealand are the only ones among 24 developed countries that haven't fallen at least 20 percent from their highs.

Taking a Toll

Stocks fell yesterday on the Federal Reserve's assessment that the turmoil caused by Europe's crisis is taking a toll on the economy. The Fed said it will replace $400 billion of short- term debt with longer-term Treasuries to spur growth. Stocks also fell as Moody's Investors Service cut three U.S. banks.

The world is on the eve of the next financial crisis, with sovereign debt its epicenter, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which runs the biggest bond fund. The European Central Bank hasn't put in place a “circuit breaker” to contain the region's debt crisis, El-Erian, who is also Pimco's co-chief investment officer, said at an event in Washington today.

“There has been a significant increase in the financial requirements of international intervention,” El-Erian said. “You need a lot more firepower in order to be a circuit breaker. Look at how much the ECB has put in and ask yourself the question: has it created a circuit breaker? The answer is no, even though the amounts involved have been massive.”

‘Minus 20'

Bets that stocks will gain make up 20 percent of Traxis Partners LLC's holdings, down from as much as 85 percent six months ago, as the threat of a recession makes equities too risky, according to co-founder Barton Biggs.

“I wish I was minus 20,” Biggs said during an interview today on Bloomberg Television's “Street Smart” with Matt Miller and Carol Massar. “I wish I was zero. I don't think any place is a place to invest.”

Global stocks fell amid the Fed's economic outlook and data indicating China's manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined.

Stock futures extended losses after a Labor Department report showed that more Americans than forecast filed first-time claims for unemployment insurance payments last week. Separately, U.S. consumer confidence dropped last week to the weakest point since the recession ended in June 2009, according to the Bloomberg Consumer Comfort Index.

Alcoa, Caterpillar

The Morgan Stanley Cyclical Index lost 5.2 percent. The Dow Jones Transportation Average decreased 3.1 percent. The KBW Bank Index slumped 2.7 percent. Gauges of raw material and energy producers had the biggest declines in the S&P 500, slumping at least 5.3 percent, as commodities erased this year's gain.

Alcoa, the largest U.S. aluminum producer, dropped 6.7 percent to $10.11. Caterpillar fell 6.9 percent to $73.90. Bank of America slid 5 percent to $6.06.

FedEx tumbled 8.2 percent to $66.58. The company, which ships more packages by air than rival United Parcel Service Inc., has seen volume growth slow as demand for express shipments stagnates amid a weakening economic recovery. FedEx also has been spending more on jet fuel, whose average cost jumped about 48 percent in the period.

Before Panic Abates

The S&P 500 may drop as low as 1,076 before investor panic abates and stocks rally, according to Tom DeMark, the creator of indicators for identifying turning points in securities.

The benchmark index for U.S. equities may fall that far intraday as early as next week and then gain as much as 20 percent, DeMark said in a telephone interview from Phoenix today. The swings will push the VIX, as the Chicago Board Options Exchange Volatility Index is known, above the high of 48 it reached on Aug. 8, he said.

“We're trying to identify when selling capitulation is about to be completed,” said DeMark, the founder of Market Studies LLC. “We're trying to identify the inflection point on the downside when the last seller sold. It could come as early as next Thursday.”

U.S. equities briefly trimmed losses as the Financial Times reported that the European Union is looking to speed up a recapitalization of 16 banks. The move would affect mostly “mid-tier” banks, the FT reported, citing a senior French official.

‘Defensive' Companies

Companies that are least-tied to economic growth, known as “defensive,” outperformed the S&P 500. Gauges of utility and telephone companies fell less than the benchmark index. Only 27 stocks in the S&P 500 rose.

“The market is pricing in a recession,” Peter Sorrentino, a senior money manager at Huntington Asset Advisors in Cincinnati, said in a telephone interview. The firm oversees $14.8 billion. We don't see a repeat of 2009. “We're into a crisis of confidence.”

Goodrich Corp. surged 10 percent to $120.60 for the biggest gain in the S&P 500. United Technologies Corp. agreed to buy Goodrich for $16.5 billion, adding the maker of aircraft landing gear and jet-turbine casings to take advantage of a record surge in commercial plane orders. Goodrich stockholders will get $127.50 a share. United Technologies dropped the most in the Dow, erasing 8.8 percent to $68.31.

--With assistance from Lu Wang in New York. Editors: Jeff Sutherland, Michael P. Regan

FW 10/4/11

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