US stocks suffer on fears for economy

US stocks fell for a fourth successive day, re-entering bear market territory, as rising jobless claims and weak retail sales figures raised fears about the health of the economy.

The market retreat came only hours before John McCain was due to accept the Republican presidential nomination with a speech that focused on his record of service and called for bipartisan co-operation in Washington.

In an interview with the Financial Times, a senior aide to Mr McCain said he would not rule out an enhanced government role to help overcome the US housing and credit crisis. “In January we assess – do we need to do more?” said Doug Holtz-Eakin, senior policy adviser to Mr McCain. “He is going to keep all his options open. You have got to do what you have got to do.”

The S&P 500 fell 3 per cent – dipping 20 per cent below its record high of last year. Investors grew more worried after US retailers reported weak same-store sales in August and the government said claims for jobless benefits were filed by 444,000 people last week – 15,000 more than the previous week.

Janet Yellen, president of the San Francisco Federal Reserve, said: “Things could get worse before they get better.” She said the credit crunch was “ongoing and perhaps deepening” while the financial system remained “very fragile”.

Ms Yellen said global growth was weakening and the US could expect less support from exports in the coming months.

The stabilisation of new home sales and slight moderation in the rate of house price declines offered a “ray of hope”. But she said the ratio of house prices to rents “remains high” and this along with high inventories of unsold homes would likely mean continued price declines.

Ms Yellen, a dovish member of the FOMC, said there had been “a shift in the inflation picture” due to lower commodity prices.

The fall in the S&P means that it is only 1.7 per cent above its low for the year in mid-July when oil prices peaked at nearly $150 a barrel.

Oil has fallen 25 per cent since then, but stocks have fallen amid fears that lower energy prices are a sign of a stalling global economy, which would hurt exporters and multinational companies. Technology, financial, industrial and materials stocks led losses.

The Nasdaq Composite fell 3.2 per cent to re-enter bear market territory. With monthly jobs data due to be released on Friday, Lehman Brothers revised its forecast of job losses in August to 100,000 from 85,000. It expects the unemployment rate will rise to 5.8 per cent from 5.7 per cent.

Bill Gross, chief investment officer of PIMCO, rattled investors when he said the US government should support financial markets. The yield on the two-year Treasury note fell below 2.20 per cent, its lowest since May.