U.S. Markets Drop Amid Poor Economic Data And Federal Reserve Chief's Warning

New York, NY (AHN) - U.S markets dropped on Tuesday as falling consumer credit in August was a clear sign the credit crunch is real. Comments from Fed Chairman Bernanke added to concerns as he believes the credit crisis will limit economic growth well into next year.

All three major indices were trading reasonably lower coming into the Federal Reserve's 3 p.m. ET release of August consumer credit. However, selling intensified once data showed a $7.9 billion drop from July, representing the worst month-over-month declines since 1998. The result also provides evidence of what investors already believed; consumers cannot get financing for large purchases.

Chairman Bernanke spoke in Washington for the National Association of Business Economics. In the speech, he noted the crisis in the financial markets subdue economic growth well into 2009. Bernanke also defended the timing of the actions taken by the Fed and Treasury in battling the crisis.

The Dow Jones Industrial average finished lower 508 points or 5.11 percent. Bank of America, down 4 percent, weighed on the average after the bank reported disappointing third quarter earnings and said they are cutting its quarterly dividend. Shares of Citigroup were also weak, down 12 percent, as the company battles Wells Fargo over Wachovia's deposits.

The S&P 500 fell 60 points or 5.7 percent, finishing at 996.23 its lowest level in 5 years. All ten economic sectors finished the session lower. Financials were the worst performer, down 11.5 percent.

The Nasdaq Composite slid 108 points or 5.8 percent, to close at 1754.88, its lowest close in roughly 4 years. Big-cap tech stocks were also weak with the Nasdaq 100 falling 5.7 percent.

Crude oil rebounded $2.25 a barrel on Tuesday, settling at $90.06 after hitting an eight month low on Monday.

In other economic news, the Federal Reserve announced it created the Commercial Paper Funding Facility. The move was made to improve the liquidity in commercial lending as the market has dried up and seen borrowing costs rise. Many companies issues commercial paper for short-term financing.

Aluminum giant Alcoa officially kicked-off third quarter earnings season, reporting results after the close. Early reports are showing profit results that are short of expectations.

Wednesday's session will see the release of August Pending Home Sales along with weekly crude oil inventories.