Investors lost some of their optimism about the economy Friday after the government's weaker-than-expected gross domestic product report and news of a drop in consumer sentiment. Reports that the government has started a criminal investigation of Goldman sent financial stocks tumbling. Investors feared that possible charges against the company could have a chilling effect on the banking industry.
The Dow Jones industrial average fell 158 points, and all the major indexes fell more than 1 percent. The Dow rose 1.4 percent for April, but it snapped an eight-week winning streak.
The market racheted higher and lower this week on alternating spurts of optimism and pessimism about the economy. The Dow had three triple-digit moves. But analysts have been expecting a pullback after months of gains.
"The market may just be a little bit tired," said Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn. "A lot of good news is priced into the market."
The market initially showed little reaction to reports about a federal investigation of Goldman, but investors' displeasure grew as the day wore on. A person with knowledge of the matter told The Associated Press that the Justice Department has begun a criminal investigation of the bank over mortgage securities deals it arranged. The person spoke on condition of anonymity because the investigation is in a preliminary phase. The Securities and Exchange Commission has charged Goldman with civil fraud.
"They're really going after Goldman pretty hard," said Ryan Detrick, senior technical analyst at Schaeffer's Investment Research. "That's got people on edge."
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A Standard & Poor's equity analyst downgraded Goldman's stock to a "sell" rating Friday. Its shares dropped more than 9 percent.
The Dow fell 158.71, or 1.4 percent, to 11,008.61. The Standard & Poor's 500 index fell 20.09, or 1.7 percent, to 1,186.69, while the Nasdaq composite index fell 50.73, or 2 percent, to 2,461.19.
Friday's pullback began after the Commerce Department said the GDP rose at a 3.2 percent annual pace in the January-March period. That was below the 3.4 percent rate economists polled by Thomson Reuters had forecast.
While the GDP was up for the third straight quarter, it was down from the fourth quarter's 5.6 percent, a rate that was inflated by government stimulus spending and companies restocking their depleted inventories. For the economy to show healthy growth, it would have to grow at a faster pace than it did the first three months of the year. Growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.
Analysts were relatively upbeat that the first-quarter growth rate, though slow, probably was good enough to help avoid a "double-dip" recession.
"GDP was slightly lower than expectations, but shows the economic recovery is probably sustainable," said Peter Cardillo, chief market economist at Avalon Partners Inc. in New York.
Investors were disappointed by a separate report from Reuters and the University of Michigan that showed consumer sentiment rose to 72.2 in April from a preliminary April reading of 69.5. However, it was still lower than March's 73.6. Economists had forecast a reading of 71.
The report shows the "consumer isn't fully recovered," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
Investors were also wary about European debt problems. The biggest concerns are in Greece, where the country faces loan repayments in a couple of weeks. If it is unable to tap a joint European Union and International Monetary Fund bailout package before May 19, the country could default on its debt.
Greece, the EU and the IMF are expected to complete talks this weekend over what extra steps the Greek government must take before it can receive bailout funds.
Greece, Portugal and Spain all saw their debt ratings slashed by Standard & Poor's this week. Greece's rating was cut to junk status. The concern in the markets is that a loan default could threaten the euro, the currency shared by 16 European nations, and in turn jeopardize the global economic recovery.
European markets fell Friday. Britain's FTSE 100 dropped 1.2 percent, Germany's DAX index fell 0.2 percent, and France's CAC-40 fell 0.8 percent.
Goldman shares tumbled $15.04, or 9.4 percent, to $145.20. Other big banks with trading operations similar to Goldman's, including Morgan Stanley and JPMorgan Chase & Co., fell more than 3 percent.
About two stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 6.3 billion shares, up from 6.1 billion Thursday.
Bond prices rose as stocks dipped. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.66 percent from 3.73 percent late Thursday.
Gold and oil prices both rose.
The Russell 2000 index of smaller companies fell 21.14, or 2.9 percent, to 716.60.
For the week, the Dow Jones industrial average closed down 195.67, or 1.8 percent, at 11,008.61. The Standard & Poor's 500 index fell 30.59, or 2.5 percent, to 1,186.69. The Nasdaq composite index fell 68.96, or 2.7 percent, at 2,461.19.
The Russell 2000 index, which tracks the performance of small company stocks, fell 25.32, or 3.4 percent, to 716.60.
The Dow Jones U.S. Total Stock Market Index - which measures nearly all U.S.-based companies - fell 328.48 points, or 2.6 percent, to 12,279.18.