Stocks fall on fears about Obama bank plan, China
Stocks tumbled Thursday after President Obama unexpectedly proposed new limits on the activities of the country’s banks and worries intensified about China’s effort to slow its economy.
The Dow Jones industrial average sank more than 200 points, its worst drubbing in almost three months, leaving the blue-chip gauge in negative territory for the first time in 2010.
Investors around the world were unnerved for a second day by China’s action to rein in bank lending to prevent the country’s economy from overheating. The move might be prudent, but stock markets worried that it could weaken a driving force behind the global economic rebound.
“China was the global engine for growth during the downturn and now they’re saying they’re going to slow down,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J. “That’s caused people to say, ‘Is the punch bowl being taken away, and is this the end of the good times?’ ”
Shares of commodity and basic-material producers were pummeled by fears of reduced demand from China. Aluminum giant Alcoa sank 6.4%. Freeport-McMoRan Copper & Gold skidded 8.7%.
The financial sector also fell sharply as Obama’s plan blindsided investors. The proposal would prevent banks from trading for their own benefit. It also would bar banks from investing in hedge funds or private equity funds and would restrict the growth of deposits and other liabilities at the biggest banks.
The plan is one the Obama administration had seemed to consider -- and reject -- months ago.
“It sort of came out of the blue,” said Tom Brown, head of Second Curve Capital in New York.
Although some analysts doubted the proposal would pass muster with Congress, they said it nonetheless showed the Obama administration’s intent to keep up pressure on Wall Street.
Shares of major banks fell hard. JPMorgan Chase was down 6.6%, Citigroup dropped 5.5% and Bank of America was off 6.2%.
Goldman Sachs Group slumped 4.1% despite reporting fourth-quarter earnings that beat analyst estimates.
The Dow dropped 213.27 points, or 2%, to 10,389.88, giving it a two-day loss of 335 points.
In the year’s first 11 trading days, which ended Tuesday, the Dow gained 2.9%. But Thursday’s broad-based sell-off left the industrial indicator down 0.4% for the year.
The Nasdaq composite index slumped 25.55 points, or 1.1%, to 2,265.70. It’s down 0.2% this year.
The Standard & Poor’s 500 index fell 21.56 points, or 1.9%, to 1,116.48. It’s clinging to a 0.1% gain for the year.
In European markets, key indexes declined between 1.5% and 2% on Thursday, adding to comparable losses Wednesday.
Investors worried that the collective effect of the administration’s recent proposals regarding the financial industry -- including a plan for a new tax on the country’s largest banks -- could damp bank earnings.
Investors already had wondered whether the surging growth in trading profits at institutions such as Goldman Sachs could maintain their recent feverish pace.
Still, analysts said the administration’s latest bid to limit banks’ so-called proprietary trading would not significantly affect their profits.
“Prop trading at all of these banks makes money,” said Chris Whalen, a managing director at Institutional Risk Analytics in Torrance. “But is it the biggest part of their businesses? No.”
