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Red on Wall Street

NEW YORK (CNNMoney.com) -- Stocks tumbled Wednesday afternoon as recession fears resurfaced following a weaker-than-expected retail sales report and dour comments on the economy from Ben Bernanke and another Federal Reserve official.

The credit market showed some signs of easing, as a key overnight bank lending rate fell. But the improvement was slowgoing and failed to reassure investors. Global markets were mostly lower.

The Dow Jones industrial average (INDU) fell as much as 515 points before pulling back a bit. The decline was equal to around 6.4%. The Standard & Poor's 500 (SPX) index lost 5.8% and the Nasdaq composite (COMP) lost 5.5%.

"The path of least resistance seems to be down again," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

Saluzzi said investors were reacting to the weak economic reports from the morning and the still-sluggish credit market.

Better-than-expected quarterly results from Intel, Coca-Cola, Wells Fargo, JPMorgan Chase and a host of regional banks had little impact amid worries about a recession.

San Francisco Federal Reserve Bank President Janet Yellen said the U.S. economy "appears to be in a recession," something many economists, but few Fed officials, have said. Yellen isn't a voting member of the Fed's policy-setting committee this year but is nonetheless seen as influential. (Full story)

Federal Reserve Chairman Ben Bernanke, speaking in the afternoon, said that while policymakers now have the tools they need to fix the financial and credit markets, the economic rebound will take time. (Full story)

The Fed's 'beige book' reading on economic activity was due later in the day.

Although Wall Street has welcomed many of the steps the government and world banks have taken to get money flowing again, investors remain skittish. That's partly because a lot of the programs won't kick in until several months from now.

"After all the damage that's been done, it's going to take a while for people to feel confident again," Saluzzi said.

Stocks rallied sharply Monday, with the Dow up 936 points or 11.1%, its best one-day point gain ever and best one-day percentage gain since 1933. The advance was fueled by bets that the United States would follow Europe in pouring money directly into banks in exchange for shares, as part of the $750 billion bailout plan.

But investors took a "sell the news" approach Tuesday after the government detailed plans to invest at least $250 billion in the nation's banks. The Treasury said it will start by investing $125 billion in nine leading banks. (Will it work?)

Last week was Wall Street's worst ever, as the Dow capped a stunning eight-session selloff that cut 2,400 points and 22% off the blue-chip indicator. That erased $2.4 trillion in market value from the Dow Jones Wilshire 5000, the broadest measure of the stock market.

Many market pros are cautiously optimistic that Friday's lows represent the lows of the bear market, or a bottom.

Treasury prices inched higher Wednesday, lowering the corresponding yields. The dollar gained versus the yen and fell against the euro. Oil and gas prices slipped, while gold prices rose.

Economy: Consumer spending has remained strained, despite the drop in gas prices over the last 4 weeks.

Retail sales fell 1.2% in September, the biggest drop in three years, after falling a revised 0.4% in August. Economists surveyed by Briefing.com thought sales would fall 0.7%. Sales excluding volatile auto sales fell 0.6%, versus forecasts for a drop of 0.2%. Sales excluding autos fell a revised 0.9% in August. (Full story)

The September Producer Price Index (PPI), a measure of inflation at the wholesale level, fell 0.4%, in line with forecasts and reflecting the decline in energy prices. PPI fell 0.9% in August. So-called core PPI, which strips out volatile food and energy prices, rose 0.4% in September, versus forecasts for a rise of 0.2%. Core PPI rose 0.2% in August.

The NY Empire State index, a regional manufacturing report, slumped to negative 24.6 from negative 7.4 in the previous month. Economists thought it would fall to negative 10. Any negative reading shows weakness, while a positive reading shows growth.

Late Tuesday, the government said the U.S. budget deficit swelled to $454.8 billion, the highest level in history.

Earnings: A number of companies reported better-than-expected quarterly results late Tuesday and early Wednesday, including a slew of banks.

JPMorgan Chase (JPM, Fortune 500) surprised investors Wednesday morning by reporting a profit versus expectations for a loss. But the company's net income plunged 84% due to charges connected to its purchase of Washington Mutual. It also took $3.6 billion in writedowns related to bad mortgage bets. Shares fell 2%. (Full story)

Wells Fargo (WFC, Fortune 500) posted weaker profit on writedowns and credit losses, but results were better than expected. The bank said it expects to complete its $11.7 billion purchase of Wachovia by the end of the fourth quarter. Shares were little changed. (Full story)

JPMorgan and Wells Fargo have fared better than many of their peers in the credit crisis. Still, the two banks are among the nine that will participate in the Treasury plan.

In other earnings news, Coca-Cola (KO, Fortune 500) reported higher quarterly earnings that beat estimates on higher sales that missed estimates. Coke's report followed Pepsi's weaker results Tuesday. Coke shares gained 5% Wednesday.

And late Tuesday, Intel (INTC, Fortune 500) reported higher quarterly earnings that edged estimates on higher revenue that was short of forecasts. The chipmaker also reported a bigger-than-expected rise in gross margins, a key measure of profitability. Shares gained 1.5% Wednesday morning.

JPMorgan, Coke and Intel are all Dow stocks. Coke and Intel were the only gainers, as 28 of the 30 components fell.

Third-quarter earnings are currently on track to have fallen 9.8% from a year ago, according to the latest estimates from Thomson Reuters.

Credit market: Some bank lending indicators improved, in a sign that the recent global initiatives to get money flowing again may be starting to work. (Full story)

Libor, the overnight bank-to-bank lending rate, fell to 2.14% from 2.18% Tuesday, according to Bloomberg.com.

The three-month Libor, what banks charge each other to borrow for three months, fell to 4.55% from 4.64% Tuesday.

The Libor-OIS spread, a measure of cash scarcity, decreased to 3.35% from 3.39% Tuesday and a record high of 3.67% Friday.

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 4.40% from 4.30% late Tuesday. The spread hit a record 4.65% Friday. The wider the spread, the more reluctant banks are to lend to each other.

Treasury prices gained, lowering the yield on the 10-year note to 4.02% from 4.07% late Tuesday. Treasury prices and yields move in opposite directions.

But the yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, fell to 0.15% from 0.25% late Tuesday, showing investors were still willing to take a meager return on their money rather than risk it on stocks. Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.

Other markets: U.S. light crude oil for November delivery fell $3.76 to $74.87 a barrel on the New York Mercantile Exchange. Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

Gasoline prices fell another 3.8 cents overnight, to a national average of $3.125 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 28th consecutive day that prices have decreased - in the past month alone, they're down more than 73 cents a gallon.