Market sinks as AT&T stirs recession fear

Typography

NEW YORK (Reuters) - U.S. stocks tumbled on Tuesday after a warning by phone company AT&T <T.N> of soft consumer spending sparked a new round of recession fears, helping drive the S&P to its worst-ever five-day start to a year.

By Jennifer Coogan

NEW YORK (Reuters) - U.S. stocks tumbled on Tuesday after a warning by phone company AT&T <T.N> of soft consumer spending sparked a new round of recession fears, helping drive the S&P to its worst-ever five-day start to a year.

In addition, Countrywide Financial <CFC.N shares plummeted on growing alarm about the No. 1 mortgage lender's financial health, dragging down shares in the financial sector.

The chief executive of AT&T said the U.S. economic slowdown was hurting the company's consumer business, sending shares of the largest U.S. phone company down 4.8 percent.

!ADVERTISEMENT!

Countrywide shares dropped 27.4 percent in its steepest decline since the stock market crash of 1987. The plunge came amid speculation the company may file for bankruptcy as it struggles to emerge from the mortgage and credit market crisis in one piece. The company denied the speculation.

AT&T's warning and Countrywide's slide triggered a decline that left the Dow and S&P with their worst five-day performance at the beginning of any year since 1991.

This year's performance so far may undermine investor confidence since the calendar's first five trading sessions are considered an "early warning system" for the year, according to the Stock Trader's Almanac.

"The market rumors on Countrywide have been putting a lot of pressure on the market," said Sam Rahman, portfolio manager at Baring Asset Management Inc in Boston. And "if there is a consumer-related weakness at AT&T that is clearly not good -- that is further confirmation that the consumer is struggling."

The Dow Jones industrial average <.DJI> was down 238.42 points, or 1.86 percent, at 12,589.07. The Standard & Poor's 500 Index <.SPX> was down 25.99 points, or 1.84 percent, at 1,390.19. The Nasdaq Composite Index <.IXIC> was down 58.95 points, or 2.36 percent, at 2,440.51.

AT&T shares fell 4.8 percent to $39.07.

Other mortgage-related stocks followed Countrywide's drop. Mortgage bond insurer AMBAC Financial Group Inc <ABK.N> lost 17.3 percent to $19.42 and rival MBIA Inc <MBI.N> sank 20.8 percent to $13.85.

Airline stocks, sensitive both to rising oil prices and signs of economic slowdown, were hammered. The American Stock Exchange index of airlines <.XAL> dropped 8 percent. Among the biggest losers were United Airline parent UAL Corp <UAUA.O>, down 16.4 percent to $24.39 and Continental Airlines Inc <CAL.N>, down 12.4 percent at $17.82.

Crude oil futures <CLc1> settled $1.31 higher at $96.40 a barrel.

In a sign that investors are bracing for recession, the market's rare gainers were defensive issues seen as resistant to economic contraction.

"Everybody is gravitating towards safety stocks, like the drug makers," Rahman said.

Blue-chip drug makers were big gainers. Merck & Co <MRK.N> rose 2.9 percent to $59.58 and Pfizer Inc <PFE.N> rose 1 percent to $23.46.

(Additional reporting by Kristina Cooke; Editing by Leslie Adler)