Dow Slides 360 Points As Financial Woes Return
NEW YORK (MarketWatch) -- U.S. stocks swooned Thursday, with the Dow industrials sliding over 360 points, as a downgrade of Citigroup Inc. revived concerns about the woes of the financial sector, sobering up markets after the euphoria of the Federal Reserve's rate cut the previous day.
Speculation that problems with bad home loans at Citigroup will force the bank to cut its dividend or take more write down led to rumors about problems at other banks, said Paul Mendelsohn, chief investment strategist at Windham Financial Services.
"Let's be realistic, we have no idea how big of a problem this whole subprime mess really is," Mendelsohn said. "Is it 200, 300, 400 billion dollars? This is the third round in the subprime fight, and we don't know how many rounds there really are."
The Dow Jones Industrial Average ended down 362 points, or 2.6%, at 13,567, its worst day since October 19, which marked the anniversary of Black Monday.
The Dow was weighed down by Citigroup , which slid nearly 7%, along with other financial stocks such American Express , AIG and JP Morgan Chase .
The S&P 500 index fell 40 points, or 2.6%, to 1,508, while the Nasdaq Composite lost 64 points, or 2.2%, to 2,794.
"It's just becoming a lot clearer that the whole financial issue is going to take a lot longer to heal," said Owen Fitzpatrick, head of the U.S. equities group at Deutsche Bank. "The Fed rate cut [Wednesday] doesn't pull us out of the woods, and those issues are still biting financials and the market."
Citigroup will have to raise more than $30 billion by either selling assets, cutting its dividend or raising capital, analysts at CIBC World Markets said as they downgraded the stock. Write-downs of securities tied to bad home loans are worsening Citi's situation, they added.
Also raising concerns, Credit Suisse Group reported a 31% drop in third-quarter net profit after the credit-market crisis wiped around 2.2 billion francs ($1.9 billion) off the value of its mortgage book and leveraged-loan commitments.
Trading volumes showed 1.7 billion shares changing hands on the New York Stock Exchange and 2.5 billion on the Nasdaq market. Declining issues topped gainers 7 to 1 on the Big Board and 24 to 5 on Nasdaq.
Exxon Mobil fell 3.8% after announcing that third-quarter income fell 10% as the rising cost of oil raised expenses and outpaced any price increases that the petroleum giant could get for its products.
Crude futures, touched $96.26 a barrel in electronic Thursday. But crude for December delivery fell back $1.04 to close at $94.53 a barrel, as the dollar gained some strength.
Sky-high crude prices are "definitely an issue for us," said Art Hogan, chief market strategist at Jefferies & Co. "We're starting to get to that tipping point where people are starting to realize that it's not only inflationary, but it's starting to hurt corporate profits."
Fed and the economy
Stocks closed with monthly gains Wednesday after the Federal Reserve cut interest rates by a quarter-percentage point, offering Wall Street just what it had been clamoring for.
The day after a Fed announcement, however, "tends to be a rough ride," Hogan said. "As we start to get concerned about the [jobs report] on Friday, the reality that the Fed might be done cutting rates is setting in."
The Fed's comments however, left some disappointed as the central bank signaled no immediate need for further cuts by emphasizing that inflation risks balanced out risks to economic growth.
The market now turns to the all-important October jobs report on Friday for further clues on the economy and monetary policy.
Ahead of this, the Labor Department reported Thursday that jobless claims dropped to their lowest level in three weeks during the week ended Oct. 27, down 6,000 to 327,000, while the number of workers continuing to claim unemployment benefits rose to it highest level in two months.
The manufacturing sector slowed for the fourth straight month in October, the Institute for Supply Management said. The ISM's index fell to 50.9% from 52% in September. Economists surveyed by MarketWatch expected a dip to 51.5%. Readings below 50% would signal contraction in the sector.
Other markets
Treasurys rallied, boosted by the slide in stocks and the economic data. The benchmark 10-year Treasury bond gained 31/32 to 103 5/32, yielding 4.350%.
The dollar index, which measures the U.S. unit against a basked of key currencies, gained 0.2%, remaining buoyed by reduced expectations that the Fed will cut rates in the future.
A rising dollar, meanwhile, took out some steam from dollar-denominated commodities such as crude and gold, with the December gold-futures contract losing $1.60 to end at $793.70 an ounce.
By Nick Godt