NEW YORK — Stocks began the fourth quarter with their worst drop in three months after reports on the job market and manufacturing reawakened investors’ pessimism about the economy.
The Dow Jones industrial average tumbled 203 points Thursday, while all the major indexes fell between 2 percent and 3 percent. The slide intensified in the final minutes of the day, signaling that traders were growing nervous ahead of the government’s key September jobs report due before the opening bell Friday.
Bond prices jumped as investors sought a safer place for their money.
It was the sixth drop in seven days for stocks and another reminder of how fragile the market’s seven-month rally has become. The economic reports overshadowed a more upbeat assessment on housing and added urgency to questions about how strong the recovery really is.
“Fear is still very, very fresh in people’s minds and the magnitude of the potential disaster that we had last September through March, I think still has investors pretty skittish,” said Darell Krasnoff, managing director of Bel Air Investment Advisors in Los Angeles. “So our sense is that some bad news can shift sentiment pretty quickly.”
The latest worries erupted when the Labor Department said new claims for jobless benefits rose last week to 551,000. Economists had expected claims would be essentially unchanged at 535,000, according to a survey by Thomson Reuters.
The mood on Wall Street darkened when the Institute for Supply Management said its index of manufacturing activity in September fell rather than rose as analysts had expected.
The employment figures rattled investors already worried about the job market. Economists predict that unemployment, which stands at a 26-year high of 9.7 percent, will rise to 9.8 percent for September. Most analysts expect the rate to top 10 percent by early next year. Economists are hoping the pace of job cuts will slow, however. Employers are expected to have cut 180,000 jobs in September compared with 216,000 in August.
The monthly report carries more weight with investors because it is less volatile than the weekly readings.
Christian Bendixen, director of technical research at Bay Crest Partners LLC in New York, said recent economic numbers have reminded investors that a recovery will be a difficult process rather than an unbroken improvement.
“For the first time in a while they’re coming in a little bit lower than expectations and I think that’s scaring a few investors,” he said.
The Dow fell 203.00, or 2.1 percent, to 9,509.28, its lowest close since Sept. 8. The drop was the biggest since July 2, when the index fell 223 points, or 2.6 percent, after the government said unemployment had risen.
The Dow shed 50 points in the final 10 minutes of trading. The late-day slide was reminiscent of the harrowing drops that buffeted the market a year ago as a freeze in the credit markets choked the economy.
Even with the drop, the Dow is still up 45.3 percent from a 12-year low of 6,547 in early March.
The broader Standard & Poor’s 500 index fell 27.23, or 2.6 percent, to 1,029.85, and the Nasdaq composite index dropped 64.94, or 3.1 percent, to 2,057.48.
The Russell 2000 index of smaller companies fell 20.53, or 3.4 percent, to 583.75.
Five stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 6 billion shares compared with 6.4 billion Wednesday.
Bond prices jumped as investors sought safety, sending the yield on the 10-year Treasury note down to 3.18 percent — its lowest since May — from 3.31 percent late Wednesday.
Several economic reports this week have raised doubts about the strength of the recovery and whether the market rally should continue. Reports on consumer confidence and Midwestern manufacturing fell short of expectations.
The bad start to October came a day after stocks wrapped up a stellar third quarter. Both the Dow and the S&P 500 index gained 15 percent. It was the Dow’s best quarter in nearly 11 years.
In other economic news Thursday, the Commerce Department said consumer spending surged by the largest amount in nearly eight years in August, even as personal income growth lags. However, with part of the advance in spending due to the government’s Cash for Clunkers program, analysts were doubting it could be sustained.
Meanwhile, the National Association of Realtors said pending home sales in August rose 6.4 percent from July to 103.8. Economists surveyed by Thomson Reuters expected the index would rise to 98.6.
Marc Harris, co-head of global research for RBC Capital Markets in New York, said caution among many investors could prevent the market from getting overheated. He pointed to a recent RBC survey of more than 700 financial executives that found more than half expected a gradual economic recovery while far fewer called for a steep rebound. That pessimism is keeping some investors from rushing into the market.
“Not everybody has jumped into the pool yet,” he said.
Harris predicts trading will be volatile as questions about the pace of the recovery dog investors.
“We’ve forgotten the world that we were living through not long ago,” he said. “People thought we were heading to zero on the S&P. I’ll take a 1,029 any day.”
The dollar mostly rose against other major currencies, while gold slid.
Light, sweet crude rose 21 cents to settle at $70.82 a barrel on the New York Mercantile Exchange.
Overseas, Britain’s FTSE 100 fell 1.7 percent, Germany’s DAX index slid 2.1 percent, and France’s CAC-40 lost 2 percent. Japan’s Nikkei stock average fell 1.5 percent.