By Adam Shell, USA TODAY  NEW YORK  Fearing that the fallout from the credit crunch will cause a deep recession, stocks suffered their worst drop since the 1987 crash Wednesday and gave back nearly all of Monday's record gains.  Despite unprecedented steps by the government to thaw credit markets, dismal economic news Wednesday from retailers and the Federal Reserve suggests that business conditions are likely to deteriorate more severely before things turn around.  "Investors are starting to worry that this will be a lot worse than your basic Recession 101," says Sam Stovall, chief strategist at Standard & Poor's.  That worry sparked a fresh bout of fear and heavy selling on Wall Street. The Dow Jones industrials plunged 733 points, or 7.9%, to 8578, its second-biggest point drop ever and its worst percentage slide since it fell 22.6% in a single day in 1987.  Perhaps most discouraging to investors is that the Dow has given back all but 127 points of its record 936-point gain Monday. Traders say the Dow is on a collision course to test the panic lows hit last Friday, a week in which it fell a record 18.2%. The Dow is 39.4% off its high.  While an official recession has not been declared because the economy has not yet had two consecutive quarters of economic contraction, Wall Street is convinced a recession has already started. Many analysts, including those at S&P and Ned Davis Research, say the recession began at the end of 2007. The only question is how deep and how long the downturn will be. "Based on Wednesday's data, the probability is it will be longer than the average recession," says Ed Clissold, NDR senior global analyst.  Hurting sentiment was retail sales, which in September suffered the steepest drop in three years. A Fed report that showed that economic conditions weakened last month in all 12 of the regional districts it tracks also drove home the message that the credit crunch has infected the broader economy.  The S&P 500 index fell 9.0% to 908, still above Friday's low. The Nasdaq composite hit fresh lows for the year, falling 8.5% to 1628.  "It is sort of the same old story: a lack of confidence in the economy and markets," says Douglas Peta, strategist at J. & W. Seligman, adding that fear is still driving investment decisions.  Todd Leone, a trader at Cowen & Co., says that the gyrations signal that the market is still trying to find a bottom. "I don't want to break the lows," he says, adding that he can't rule out lower lows.  If there is a silver lining, it is that stocks tend to start rebounding "halfway" through recessions, says Jeff Kleintop, market strategist at LPL Financial.  You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference.
Risk aversion wrestled stock markets down Wednesday, snuffing a two-day rally even after government bank bailouts took the edge off money market stress.