Financial sector fears sink stocks
Stock prices slid Tuesday on growing concern that the financial sector was still suffering badly from the credit crisis. The Dow Jones industrials dropped more than 100 points for the second day in a row.
The market treaded water for much of the session, then tumbled late in the trading day as concerns about financial companies intensified. Reports that Lehman Bros. Holdings planned to raise $4 billion in capital later expanded into a rumor on trading desks that the investment bank had approached the Federal Reserve to borrow money.
Lehman shares dropped as much as 15%, dragging down other financial stocks and the rest of the market before the company denied the rumor, pushing shares back up.
“This market’s very jittery and nervous, and a lot of times you’ll see wild moves, wild gyrations, when it’s driven by rumors and innuendo,” said Jim Herrick, manager of equity trading at Baird & Co. The rumors, he said, reminded investors of Bear Stearns Cos.’ near-collapse in March.
The Lehman rumors followed a spate of bad news Monday about other financial companies, including a downgrade of the debt of Wall Street’s four biggest investment banks by Standard & Poor’s. Separately, anxiety about weak May auto sales and fresh concerns about inflation cut into investors’ appetite for stocks.
The Dow fell 100.97 points, or 0.8%, to 12,402.85 after being down more than 160 points early on.
Broader market indexes also declined. The S&P; 500 dropped 8.02 points, or 0.6%, to 1,377.65, while the Nasdaq composite fell 11.05 points, or 0.4%, to 2,480.48.
The Russell 2,000 index of smaller-company stocks fell 2.02 points, or 0.3%, to 739.
Declining issues outpaced advancers by about 3 to 2 on the New York Stock Exchange.
Comments by Federal Reserve Chairman Ben S. Bernanke seemed to support the market early in the session. In a speech via satellite to a conference in Barcelona, Spain, the Fed chief reiterated expectations that the economy would rebound in the second half of the year because of interest-rate cuts by the central bank, its loans to commercial and investment banks and the federal government’s tax rebates. But he also signaled that interest rates would remain on hold, saying the economy faced head winds because of rising prices for food and energy.
Inflation-wary investors have been wrangling with record oil and gasoline prices. Though oil has retreated since peaking last month at $135.09 a barrel, there is fear that higher energy costs are already hurting strapped consumers, whose spending accounts for more than two-thirds of economic activity.
Crude futures fell $3.45 on Tuesday to settle at $124.31 a barrel on the New York Mercantile Exchange.
Bernanke’s comments set off sharp reactions across other markets. The biggest response came in the dollar, which rallied after the Fed chief said he would remain attentive to the sagging currency because of its effect on inflation.
Yields on government debt were mixed on expectations that interest rates would be placed on hold. The 10-year Treasury note’s yield fell to 3.9% from 3.96% late Monday.
“There’s still some more bad news to come on credit and the economy, but I think it’s positive that most people think we’re past the peak of the crisis,” said Alexander Paris, market analyst at Chicago-based Barrington Research.
Government data released Tuesday showed a surge in factory orders, and a barometer of capital spending by U.S. businesses also jumped. News about the manufacturing sector has been relatively upbeat in recent weeks.
“The main concern about the economy is clearly the consumer,” Paris said.
That was spelled out when Ford Motor said its May U.S. sales fell 16% from last year, while General Motors said its sales were down 28%, in part because of strikes at a supplier and some GM plants.
Rick Wagoner, GM’s chief executive, said the company planned to halt production at four North American plants and was considering a sale of its Hummer brand. Wagoner said he believed high oil prices had permanently altered consumer behavior. But GM gained 14 cents to $17.58. Ford rose 4 cents to $6.68.
Lehman and other investment banks dipped to lows not seen since March 17, when the deal that led to JPMorgan Chase’s acquisition of Bear Stearns was announced. The sector recovered much of the drop as the session wore on.
Lehman shares closed down $3.22, or 9.5%, at $30.61 despite its treasurer’s denial of rumors about borrowing from the Federal Reserve’s discount window and his assertion that the company had sufficient liquidity.
An index of financial stocks in the S&P; 500 closed down 0.6% after dropping as much as 1.9%.
“There’s this long, slow grind in the financials, and the market’s still trying to find the silver bullet to address all of these concerns at the big banks and money centers,” said Craig Peckham, market strategist at Jefferies & Co.
Overseas, key stock indexes rose 0.8% in Britain, 0.2% in Germany and 1% in France. Shares in Japan sank 1.6%.
