The Dow Jones industrial average plunged 306 points, capping a 14.2 per cent slide from its all-time high in October. After 12 days of trading, the broader Standard & Poor’s 500-stock index is off to its worst January on record. And the Russell 2000 index, which tracks small companies, sank into a bear market. “All the momentum is pointing down,” said Bruce Bittles, chief investment strategist at Robert W Baird. “There’s no way to sugarcoat that.”

Corrections of this magnitude have coincided with recessions in the past, though not always. In 1990, a steep sell-off presaged a downturn, while a similar drop in 1998 came and went with no apparent effect on the broader economy.

But the stock market isn’t the only part of the financial world that is pointing to trouble. The Baltic Dry index, a shipping index that is considered a leading indicator on the health of the global economy, has plummeted. And investors have fled high-risk corporate bonds, which can default in times of trouble.

And a troubling trend is emerging in the S&P 500 Shares of energy and materials companies, the top performers last year, have fallen to the bottom of the pack. Investors appear to be betting that those sectors will be hurt by a coming downturn, and are looking to get out. Indeed, losses accelerated throughout the day, with a flurry of selling in the final hour of trading. Trading on the NYSE reached its highest level since the summer.

“Selling causes more selling. People panic and want to cut their losses,” said David Kovacs, a quantitative investment strategist at Turner Investment Partners in Berwyn, Pa. “Everyday now, you have more and more investors leaning towards the camp that yes, there is going to be a recession, and it could be a severe one.”

Manufacturers, hit hard by the housing downturn, are facing new woes. The Fed said on Thursday that business at Philadelphia-area manufacturers, a bellwether for the industry, slowed significantly. A similar drop occurred in early 2001 - just before the onset of the last recession. The Fed report was the first of a steady drumbeat of poor economic news that sent the main stock indexes deep into the red. The S&P 500 tumbled 2.9 per cent, below its low for last year, set in March. It closed at 1,333.25, down 39.95 points.

Hints from Ben S Bernanke, the Fed chairman, that the central bank would lower interest rates at its meeting later this month left many investors unimpressed. In a testimony before the Congress on Thursday, Bernanke promised to support a government stimulus package to prop up the ailing economy.

Some market watchers said the chairman was leaning on government support in lieu of aggressively cutting rates. “The market is frustrated with Bernanke,” Kovacs said. “Bernanke said it would be nice to have an economic stimulus package to help him with his fight. You didn’t see Greenspan asking for help.”