Weak Chicago PMI Jolts Markets

Fresh signs of weakness in the manufacturing sector hit stocks hard on Wednesday, sparking a broad selloff led by the industrial sector.

Losses in major stock indexes piled up after the Chicago Purchasing Manager's Index showed a surprising decline. The measure fell to 46.1 for September, down from August's reading of 50, which is the level at which the index signals an overall expansion in activity.

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Analysts were expecting the index to show continued improvement, to 52, but instead got a fresh reminder that the U.S. recession isn't quite over.

"We're getting some reality-check type of numbers here," including a weaker-than-expected reading of consumer confidence in the previous session, said strategist Peter Boockvar, of Miller Tabak in New York. "Maybe expectations got too far ahead of themselves" for a steady late-year economic rebound in the U.S.

The Dow Jones Industrial Average managed a 22-point gain at its morning high but recently fell 89 points, or 0.9%, at 9653.03. The Nasdaq Composite Index slid 1%. The S&P 500 fell 1%, hurt by declines in every sector. Industrials were the weakest, off 1.3% as a group. The financial, consumer-discretionary, utilities and health-care sectors were close behind, off about 1% each.

Treasury prices, which had been declining before the Chicago report's release, were recently higher. The 10-year note was up 1/32, yielding 3.291%. Comex gold futures also gained, rising $6.40 to top $1,000. The Chicago Board Options Exchange Volatility Index gained 2.7% to 25.86.

Investors have generally been in a more cautious mood in recent days, heading into the end of 2009's third quarter at the closing bell Wednesday. The period has included banner gains in major indexes, which some traders worry has set up a correction heading into year end.

Strategist Denis Amato, of Ancora Advisors in Cleveland, said his firm has been selling shares and building its cash reserve due to concerns about the direction of the economy.

"We're right on the cusp of a big change, but it's hard to tell which way things are going to go," said Mr. Amato. "It looks like we can have continued improvement in earnings or higher [valuations on stocks], but not both."

The Dow is up 15.3% for the period, on track for its best quarterly performance since 1998. The Dow also is on track to defy tradition by clocking gains for September, a month in which stocks over the long term have shown an average decline of more than 1%. The average is up 2.6% for the month.

In other economic news Wednesday, a report from the Commerce Department showed the economy contracted at a 0.7% rate in the second quarter, better than the earlier estimated 1% annual rate of decline. GDP shrank 5.4% in the fourth quarter of 2008 and 6.4% in the first quarter of 2009.

Separately, a closely watched report from payroll processing firm Automatic Data Processing and Macroeconomic Advisors showed that U.S. private sector employers dropped 254,000 jobs from their payrolls last month, more than the 240,000 jobs decline expected by economists. The Labor Department's monthly report on nonfarm payrolls are due on Friday.

Among stocks to watch, CIT Group shares plunged 35% after The Wall Street Journal reported that the troubled lender to small and midsize companies may seek a restructuring that would likely wipe out the value of common shares.

Jabil Circuit shares jumped 7.2% after the company reported that earnings in its last quarter dropped 90% but that markets continued to improve.

Crude-oil futures rose 79 cents to $67.50 a barrel after a report showed rising fuel demand and declining gasoline inventories. The greenback was recently lower against both the euro and the yen.