March 5 (Bloomberg) -- U.S. and European stocks tumbled, driving the Standard & Poor’s 500 Index to the lowest level since 1996, after Moody’s Investors Service said it may cut JPMorgan Chase & Co.’s credit rating and China quelled speculation the government will add to its stimulus plan.

JPMorgan dropped 14 percent as lenders led the plunge. Wells Fargo & Co. and Bank of America Corp. slumped 12 percent after Moody’s said it’s reviewing their ratings, while Citigroup slipped below $1 for the first time. General Motors Corp. sank 15 percent after its auditor said the automaker may not survive. European stocks fell after Aviva Plc, the biggest U.K. insurer, reported a loss.

“People are abandoning equities as an asset class,” Scott Minerd, who helps oversee about $30 billion as chief investment officer at Guggenheim Partners Asset Management in Santa Monica, California. “The market is trying to cope with the idea of lower earnings prospects and that the economy won’t turn around in the near term.”

The S&P 500 lost 4.3 percent to 682.55. The Dow Jones Industrial Average decreased 281.40 points, or 4.1 percent, to 6,594.44. Europe’s Dow Jones Stoxx 600 Index fell 3.6 percent to 161.59. Treasuries rallied, driving the yield on 10-year notes down to 2.82 percent from 2.97 percent, and the U.S. dollar index climbed 0.6 percent.

Concern corporate defaults will rise, the deepening global recession, and dividend cuts at companies from General Electric Co. to JPMorgan have dragged the S&P 500 to three consecutive weeks of declines, pushing the index down 24 percent this year. It has fallen 7.2 percent since Feb. 27.

$585 Billion Plan

Stocks rallied yesterday for the first time since Feb. 24 on speculation China would broaden efforts to boost growth and U.S. lawmakers will reach agreement on a plan to stem mortgage defaults. Chinese Premier Wen Jiabao said today the country’s 8 percent growth target for this year is within reach, indicating the government doesn’t see the need to increase a 4 trillion yuan ($585 billion) economic stimulus.

Financial companies in the S&P 500 lost 9.9 percent, the most among 10 industries. JPMorgan fell 14 percent to $16.60, the lowest price since October 2002. Wells Fargo dropped 16 percent to a 13-year low of $8.12. Bank of America retreated 12 percent to $3.17, the lowest since July 1984. Citigroup lost 9.7 percent to $1.02 and earlier slumped to 97 cents.

JPMorgan had its ratings outlook cut by Moody’s to negative from stable. Moody’s said it will review the long-term debt ratings of Wells Fargo and Bank of America on concern higher credit costs may damage capital ratios.

Credit Losses

S&P downgraded JPMorgan, Wells Fargo and Bank of America, along with 11 other banks, on Dec. 19. The firm cut Bank of America again two days ago, saying the bank’s earnings might be lower than estimated in December because of more credit losses.

General Electric Co. dropped 0.5 percent to $6.66, the lowest price since November 1992, even after the company said its finance unit will be profitable this year.

GM slumped 15 percent to $1.86. The largest U.S. automaker said its auditors made a “going concern” ruling, meaning they are unsure the company will remain in business. GM also disclosed a “material weakness” in its accounting procedures.

“GM is weighing on things because it’s an extraordinarily large employer and it has financial involvement with large institutions,” said Uri Landesman, who manages $2.5 billion at ING Investment Management Inc. in New York. “The implications of a bankruptcy filing is a headache for everyone.”

February 1988

Energy companies and metal producers retreated following the Chinese premier’s remarks. Exxon Mobil Corp., the largest company by market value, fell 5.3 percent to a 2 1/2-year low of $62.22. Alcoa Inc., the biggest U.S. aluminum company, lost 16 percent to $5.26, the lowest price since February 1988.

“The global economy is still decelerating and China’s stimulus plan that everyone was counting on to rally around isn’t there,” said Peter Kenny, a managing director of institutional sales at Knight Equity Markets in Jersey City, New Jersey. “The most optimistic participant is hoping that the market will hold water. No one’s expecting a rally.”

Moody’s projects defaults will more than triple this year and exceed the level during the Great Depression. Goldman Sachs Group Inc. economist Binit Patel forecast today that the world economy will shrink 0.6 percent this year, three times faster than a prior forecast.

Travel, Clothing

Industrial companies and makers of consumer goods slid as the global recession weighs on demand for everything from air travel to clothing and computers. An index of S&P 500 companies that rely on consumers’ discretionary spending declined 4.7 percent to the lowest level since September 1996 even as the U.S. government released better-than-expected jobs data.

The Labor Department said 639,000 Americans filed claims for jobless benefits, the fifth straight week above 600,000. That marks the worst performance since 1982. Economists surveyed by Bloomberg estimated jobless claims of 650,000 for the week that ended Feb. 28.

A separate private report showed Americans fell behind on their mortgages and banks seized homes at a record pace in the fourth quarter. Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans, the highest going back to 1972, the Mortgage Bankers Association said.

Abercrombie & Fitch Co. slumped 13 percent to $18.24. The apparel retailer said sales at stores open at least a year slumped 30 percent, more than the 20 percent decline estimated by analysts in a survey by Retail Metrics Inc.

Two Years or More

Airlines slumped after British Airways Plc said it sees no return to profit until fiscal 2011 at the earliest. AMR Corp. lost 18 percent to $2.54. Delta Air Lines Inc. dropped 12 percent to $3.93.

Hewlett-Packard Co., the world’s largest maker of personal computers, slid 5.5 percent to $27.08. Global personal-computer shipments will fall 4.5 percent this year as unemployment rises and companies curb spending, research firm IDC said.

“Sentiment is still very bad, nothing has improved,” said Sandro Rosa, an equity strategist at Clariden Leu in Zurich, which manages $120 billion. “We’ll have more bad news and the market takes every opportunity to go down. Economic numbers haven’t woken up any hopes.”

The highest pessimism on record among U.S. investors suggests the S&P 500 will rebound after sinking to a 12-year low this week. The American Association of Individual Investors said 70.27 percent of investors were bearish as of yesterday. That’s the highest reading since the index’s creation in 1987.

‘Closer to a Bounce’

The AAII index measures sentiment on U.S. stocks for the next six months among individual investors. Its prior peak of 67 percent was set in October 1990, when the S&P 500 closed at 305.74. The stock benchmark then surged fivefold through 2000.

“When emotions get to one extreme, you get a counter-trend move,” said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. “Today, it’s very much at an extreme. It tells you that you’re closer to a bounce than not.”

The benchmark for U.S. stock options rose for the first time in three days. The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 5.5 percent to 50.17. The index, a gauge of prices to use options as insurance against declines in the S&P 500, has averaged 36.09 over the past year.

Wal-Mart Stores Inc. gained 2.6 percent to $49.75. Customers made more trips to buy groceries, televisions and other products for entertaining at home last month, outpacing the retailer’s quarterly sales forecast. The company raised its annual dividend by 15 percent.

European stocks extended their declines even after European Central Bank President Jean-Claude Trichet indicated policy makers may reduce interest rates further to combat the deepening recession. The ECB cut the main refinancing rate to a record low of 1.5 percent today.

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: March 5, 2009 16:22 EST