Wall Street drops on Wal-Mart and spending fears

NEW YORK (Reuters) - Stocks fell on Thursday as disappointing December sales and a dim outlook from Wal-Mart Stores Inc heightened worries over consumer spending and a worsening recession.

Shares of Wal-Mart, the world's largest retailer, slid nearly 9 percent to $50.55 on the New York Stock Exchange, making it the Dow's top drag.

Wal-Mart offered the starkest indication yet that consumer spending, which accounts for about two-thirds of U.S. economic activity, continues to falter as households fret about mounting unemployment and dwindling savings.

Analysts had thought cut-price retailers like Wal-Mart would fare better than more up-market outlets as cash-strapped consumers stretch their dollars in a tough economy. The S&P retail index <.RLX> fell 2.1 percent.

"The Wal-Mart news shows how difficult the economic environment is," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm based in Toledo, Ohio. "Whether it's earnings or pre-announcements it's not your typical scenario. Any kind of recovery is going to be anemic."

The Dow Jones industrial average <.DJI> slid 100.27 points, or 1.14 percent, to 8,669.43. The Standard & Poor's 500 Index <.SPX> dropped 8.47 points, or 0.93 percent, to 898.18. The Nasdaq Composite Index <.IXIC> declined 11.70 points, or 0.73 percent, at 1,587.36.

The retail fallout hit shares of other consumer-oriented companies, including hamburger chain McDonald's Corp , whose shares fell more than 2 percent to $59.88.

Shares of home improvement chain Home Depot were off 2.4 percent at $23.99 and department store chain Macy's declined 2.2 percent to $11.06 after it posted a December sales drop and said it would close 11 money-losing stores.

Limited Brands , the parent of lingerie chain Victoria's Secret, also disappointed, its shares falling 7.7 percent to $9.88 after it posted an unexpectedly big 10 percent slide in December sales at stores open at least 12 months and forecast fourth-quarter profit below analysts' estimates.

On the economic front, investors awaited U.S. President-elect Barack Obama's speech on the economy at 11 a.m.

With Thursday marking the market's 5th session of the new year, a down day would fuel anxiety about its ability to push ahead with a recovery from its November 21 bear market low.

According to the Stock Trader's Almanac January's first five days act as an "early warning" on the year's prospects.

Disappointing outlooks from Alcoa Inc and Intel Corp and signs on Wednesday of mounting job losses sent U.S. stocks to their worst tumble in more than a month. Both the Dow industrial average and the S&P 500 have now erased their gain for 2009. Even so, the S&P 500 is still up 19 percent since its November 21 low.

A new Reuters poll of economists shows expectations for Friday's U.S. nonfarm payrolls data have soured further, with the consensus now calling for a loss of 550,000 jobs in December and the unemployment rate to climb to 7.0 percent.

(Editing by James Dalgleish)

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