Dow plunges 400 points

Stocks plunged Monday afternoon, starting a new month on a bad foot, as dismal manufacturing reports worldwide added to fears of a prolonged recession.

In a report released Monday, the National Bureau of Economic Research confirmed what many have long believed - that the nation is in a recession. According to the NBER, the official body that calls economic cycles, the U.S. has been in a recession since December 2007.

The Dow Jones industrial average (INDU) lost over 400 points - or 4.6% - almost three hours into the session. The Standard & Poor's 500 (SPX) index lost 5.6% and the Nasdaq composite (COMP) gave up 5.6%.

Stocks gained in a holiday-shortened trading week after President-elect Obama announced his economic team and the government bailed out Citigroup. The Dow and S&P 500 rose Friday for the fifth consecutive session, the best streak since July 2007.

Positive reports on Black Friday, the start of the critical holiday-shopping period, also helped stocks late last week. But the advance petered out Monday as investors eyed the day's economic news and worried that the Black Friday momentum was unsustainable.

"Last week we saw stocks drift higher on no volume, so you're seeing some profit taking today when more people are here," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

He said what will be more significant is whether the market can hold in near these levels or whether it's going to go back down to the lows of mid-November

Rovelli said that everyone will be looking to Thursday's November retail sales reports from the nation's chain stores, as they include Black Friday and the Thanksgiving hoiday weekend.

"If they don't report a lift up in same-store sales, even with Black Friday included, that's going to be a big negative," Rovelli said.

Same-store sales is an industry metric that refers to sales at stores open a year or more.

Economy: The Institute of Supply Management said its November manufacturing index fell to a 26-year low of 36.2 from 38.9 in October. That was worse than what economists were expecting, according to a survey from Briefing.com.

October construction spending fell 1.2% versus a flat reading in the previous month. Economists thought spending would drop 1%.

Global economic news was pretty grim as well, with manufacturing surveys in Britain and the euro zone showing a steep slowdown. A reading on China's manufacturing survey was equally worrisome.

Asian markets ended in mixed territory and European markets tumbled in the afternoon.

Obama: The president-elect announced his national security team. As expected, Sen. Hillary Clinton, D-N.Y., was nominated Secretary of State and current Defense Secretary Robert Gates was asked to stay on. Retired Marine Gen. James Jones was nominated as national security adviser, Eric Holder was picked for Attorney General and Arizona Gov. Janet Napolitano was the choice for Secretary of Homeland Security. (Full story)

Retail sales: Shoppers came out in droves over the weekend, motivated by pent-up demand and deep discounts, but the surge is not expected to last.

Including "Black Friday," the day after Thanksgiving, shoppers spent $41 billion in the four-day holiday weekend, according to the National Retail Federation (NRF), an industry trade group. The average shopper spent $372.57, up 7.2% from a year ago.

However, overall 2008 holiday spending is expected to rise just 2.2% from a year ago, the smallest gain in six years.

Early predictions are for "Cyber Monday" online shopping sales to be pretty flat with a year ago.

Consumer spending drives two-thirds of economic growth, and the pullback has exacerbated the economic slowdown.

Automakers: GM (GM, Fortune 500) and Ford (F, Fortune 500) gained last week on growing bets that they, along with Chrysler, will receive a government bailout. But the stocks tumbled Monday in tune with the broader market.

The auto industry's first pitch to Congress was rebuffed, but there is increased speculation that its second pitch will be more successful.

The companies have until Tuesday to submit proposals for how they would use $25 billion in taxpayer money to make their companies "viable." The Senate Banking Committee is scheduled to host a hearing Thursday, while the House Financial Services Committee is holding a hearing Friday.

Other movers: Johnson & Johnson (JNJ, Fortune 500) said it will buy breast implant maker Mentor (MNT) for $1.07 billion, or $31 a share, nearly double the company's closing price from Friday. Dow stock J&J fell 3%, while Mentor gained 89%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 9 to 1 on volume of 500 million shares. On the Nasdaq, decliners topped advancers by four to one on volume of 720 million shares.

Other markets: The dollar gained versus the euro but fell against the yen.

U.S. light crude oil for January delivery fell $4.39 to $50.04 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $47 to $772 an ounce.

Gasoline prices continued the fall to nearly four-year lows, with prices down half a cent to a national average of $1.820 a gallon, according to a survey of credit-card swipes released Monday by motorist group AAA. Prices have been sliding for more than two months, losing over $2 a gallon or 53%.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 2.82% from 2.92% Friday. Last month, the 2-year, 10-year and 30-year government bonds all hit their lowest levels since the Federal Reserve started keeping records in 1962.

The yield on the 3-month Treasury bill improved to 0.03% from 0.02% Friday, but still not far from 68-year lows of zero hit last month. The 3-month is seen as the safest place to put money in the short term. A low yield means wary investors would rather preserve cash despite earning little or no interest on it than risk the stock market.

Lending rates were mixed. The 3-month Libor rate held steady at 2.22%, unchanged from Friday, while overnight Libor fell to 1.09% from 1.16% Friday, according to Bloomberg. Libor is a key bank lending rate.