Stocks on the verge of correction

Shares fall sharply in their worst day of the year. The Dow has erased its 2012 gains.

The stock market is now in correction territory, and investors fear the worst may be yet to come for the global economy.

Investors headed for the exits this week amid fears about Europe’s continuing debt woes and concerns about China’s economy weakening. But a dismal U.S. jobs report released Friday seemed to push investors to a breaking point.

Major U.S. indexes all posted sharp declines of more than 2% in what was the worst day for stocks this year.

The Dow Jones industrial average lost 274.88 points, or 2.2%, closing at 12,118.57. The broader Standard & Poor’s 500 index lost 32.29 points, or 2.5%, to 1,278.04. The Nasdaq composite dropped 79.86 points, or 2.8%, to 2,747.48.

Some $525 billion poured out of U.S. stocks during the last week, when the blue-chip Dow erased its gains for the entire year. The S&P was still up 1.6% for all of 2012. Both indexes were on the verge of an official correction — a decline of 10% from their recent highs — while the Nasdaq ended the day down 12% from its March 26 high of 3,123 points.

“We are correcting, without a doubt,” said Robert Verderese, a managing director at Knight Capital Group. “It’s really just chaos on a global scale right now, and today’s economic data out of the U.S. just really put the nail in the coffin.”

The Labor Department reported that employers added only 69,000 jobs in May, far fewer than the 150,000 jobs economists had predicted. U.S. manufacturing also came in under expectations.

The nose dive for U.S. markets followed a rough day in European equities markets. Of major European markets, German’s DAX fared the worst, ending the day down 3.4%.

As investors sold off stocks, they plowed their cash into safe investments, pushing down Treasury yields to records lows. The benchmark 10-year Treasury note’s yield fell below 1.5% for the first time ever. Bond yields move inversely to prices.

“There’s maximum fear,”

said Douglas Cote, chief market strategist at ING Investment Management in New York. “People are just running for safe, liquid assets.”

What was especially disheartening to investors was that things had been looking up for the U.S. economy.

Consumer spending, a crucial economic driver, rose in April, as did construction spending.

The troubled housing sector had shown signs it was regaining its footing. Home sales are rising along with housing starts, permits and builder confidence. Mortgage rates are at record lows and vacancy and foreclosure rates have been moderating.

And U.S. corporate profits also have beaten expectations, Cote said.

“The market doesn’t seem to be recognizing that,” he said.

Wall Street got its first bad economic snapshot Thursday when the federal government reported the economy grew less in the first quarter than previously estimated.

Gross domestic product grew at a 1.9% annual rate in the first three months of the year, slower than 2.2% as previously measured, the U.S. Bureau of Economic Analysis said.

“It’s really jobs and housing — those are the keys to our economy,” Verderese said. “Until those things are turned around, we’re going to be in trouble for a while.”

As investors fear a U.S. economic slowdown, Wall Street will still focus heavily on Europe in coming weeks.

The European Central Bank will meet Wednesday, and Greece will hold elections June 17 that will determine whether the country follows through with austerity measures required as part of a bailout.

Meanwhile, the continent’s leaders have yet to solve the Eurozone’s intractable debt crisis. Spain’s banking system is in turmoil. The future of the euro common currency remains in doubt.

Investors are hoping for coordinated monetary and fiscal efforts by global leaders to boost confidence, Verderese said.

In the U.S., congressional gridlock ahead of November’s presidential election could prevent any coordinated fiscal strategy to boost the economy, he said.

“We’re still in wait mode,” Verderese said. “There’s really no reason — other than that they’re down — to buy stocks.”