A Nasty October Surprise for Stocks

U.S. stocks managed to skate through the normally tricky month of September in good shape, with the S&P 500 index rising 3.5%. But the first day of October brought fresh reminders of of the fragility of the U.S. economic recovery, causing major indexes to plunge Thursday. The worst damage was sustained by the Nasdaq composite index, which lost more than 3% on the session.

In particular, an unexpected rise in jobless claims created some jitters ahead of Friday's release of the U.S. employment report for September, while a decline in the Institute for Supply Management's manufacturing index in September raised worries about the strength of the rebound in the factory sector.

On Thursday, the 30-stock Dow Jones industrial average finished lower by 203.00 points, or 2.09%, at 9,509.28. The broad Standard & Poor's 500-stock index was down 27.23 points, or 2.58%, at 1,029.85. The tech-heavy Nasdaq composite index lost 64.94 points, or 3.06%, to 2,057.48.

On the New York Stock Exchange, 25 stocks were lower in price for every five that advanced. Breadth on the Nasdaq was 22-5 negative. The basic materials, technology, and financial sectors were among the worst performers on the session.

Treasuries soared amid the equity sell-off, with yields moving sharply lower. The dollar index was higher, putting pressure on gold and crude oil futures.

What could Friday's session bring? "After a wash-out such as this in which few stocks are left unscathed, it is common to see a reversal to the upside, even if just for a day or two," says Standard & Poor's technical analyst Chris Burba. "This is certainly a possibility [on Friday]". However, notes Burba, much will depend on the reaction to the September employment report at 8:30 a.m. ET.

The weekly jobless claims report released Thursday appeared to have sparked fears of a downside surprise in Friday's jobs data. U.S. jobless claims rose 17,000 to 551,000 in the week ended September 26, vs. a revised 534,000 previously (was 530,000). Continuing claims fell 123,000 to 6,090,000 in the week ended Sept. 19, after a revised 6,160,000 (was 6,138,000).

"The headline print is higher than expected, and may make some nervous ahead of Friday's September employment report," says Action Economics.

Worries also surfaced about the recovery in the factory sector after the U.S. Institute for Supply Management's manufacturing index slipped to 52.6 in September, after rising 4 points to 52.9 in August.

The two reports countered some positive data on the real estate sector. U.S. construction spending rose 0.8% in August from a revised 1.1% drop in July (was -0.2%). Residential spending climbed 4.2% following a 0.7% increase (revised from 2.3%). Spending on nonresidential projects declined 0.4% after a 1.8% July drop (revised from 1.2%). Private spending rebounded 1.8% and public spending fell 1.1%.

The U.S. pending home sales index climbed 6.4% to 103.8 in August from 97.6 in July. That is the highest since March 2007. On a year-over-year basis the index is up 12.1%, but that is a little slower than the 12.9% pace in July. Gains were posted in all four regions.

U.S. personal income rose 0.2% in August, while spending climbed 1.3%. July's flat reading on income was revised up to 0.2%. Personal spending in July was revised to 0.3% (from 0.2%). Disposable income inched up 0.1% in August. The savings rate fell to 3.0% in August from 4.0% previously (revised from 4.2%). The chain price index rose 0.3% from flat in July, while the core rate was up 0.1%, the same as in July. Federal Reserve Chairman Ben Bernanke discussed regulatory reform in his written testimony on the topic before the House Committee on Financial Services Thursday. Bernanke proposed an "oversight council made up of the agencies involved in financial supervision and regulation should be established, with a mandate to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies' responses to potential systemic risks." Other steps include legislative change for consolidated supervision of systemically important firms; a new resolution process to wind down such firms; hardening payment, clearing and settlement systems; and ensuring consumer protections.

Bloomberg News reported the International Monetary Fund said the global economy will expand 3.1% in 2010, more than a July forecast of 2.5%. China's economy will grow 9% and India's 6.4%. That compares with growth of 1.7% in Japan, 1.5% in the U.S. and 0.3% in the euro region. The IMF, whose members are gathering in Istanbul for next week's annual meeting, warned that the recovery would be "weak by historic standards" and said restoring banks to health remains a priority. The world economy will contract 1.1% this year, less than the 1.4% projected in July, the IMF said.

In company news, Bank of America (BAC) shares rose after CEO Ken Lewis confirmed his retirement by the end of the year after all the controversy over financial giant's merger with Merrill Lynch, with no replacement announced yet.

Cisco Systems (CSCO) fell after making a $3 billion offer for Tandberg, a Norwegian video conferencing firm.

Comcast (CMCSK) denied that it had made a $35 billion bid for the NBC Universal unit of General Electric (GE).