June 20 (Bloomberg) -- U.S. stocks fell for the first time in five weeks as a decline in crude oil hurt fuel producers and Standard & Poor’s downgraded the credit ratings of 18 banks.

Exxon Mobil Corp. led energy companies in the S&P 500 to the biggest drop among 10 industries as oil had the first weekly retreat in more than a month. Wells Fargo & Co. and Capital One Financial Corp., among the banks downgraded, fell more than 5 percent after S&P said tighter regulation and greater market volatility may limit their ability to repay debt.

The S&P 500 declined 2.6 percent to 921.23 this week, paring its rebound from a 12-year low on March 9 to 36 percent. The Dow Jones Industrial Average fell 259.53 points, or 3 percent, to 8,539.73. The Russell 2000 Index of small companies lost 2.7 percent to 512.72.

“Lower prices for oil reflect the mood that the economy is not going to grow as quickly as people previously expected,” said Giri Cherukuri, who helps manage $1.2 billion at Oakbrook Investments in Lisle, Illinois. “People still watch oil a lot.”

Stocks have increasingly depended on the performance of oil, with the price of crude and the S&P 500 moving in the same direction the past five weeks. Their so-called correlation coefficient based on the past 12 weeks is 0.89, the highest since December, according to data compiled by Bloomberg. Readings of 1 mean prices are moving in lockstep.

Exxon, the world’s largest oil company, fell 3.7 percent to $71.05. Crude oil futures, which closed at a seven-month high of $72.68 a barrel on June 11, retreated 3.5 percent to $69.55.

‘New Reality’

Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, fell 13 percent to $50.93 amid speculation Chinese demand for copper is leveling off.

Wells Fargo, the second-biggest U.S. bank by market value, led the KBW Bank Index to a 3.4 percent decline, falling 5.1 percent to $24.19.

“Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality,” S&P credit analyst Rodrigo Quintanilla said in a June 17 statement. “Such a transition period justifies lower ratings as industry players implement changes.”

Health-care companies in the S&P 500 rose 2.1 percent as a group, their first advance in three weeks, led by insurers Cigna Corp., Coventry Health Care Inc., Aetna Inc. and WellPoint Inc. An industry overhaul proposed by Senator Edward Kennedy, a Democrat, would cost $1 trillion and still not cover all Americans, the Congressional Budget Office said.

‘Run Into Some Issues’

The report strengthens the case against measures the industry opposes such as government-backed insurance, said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York.

“Whenever uncertainty has come up in the regulatory arena, we’ve seen that sector or the market in general run into some issues,” said Pat Becker Jr., chief investment officer at Becker Capital Management Inc. in Portland, Oregon. Becker Capital oversees $1.8 billion.

General Electric Co. declined after Obama proposed expanding federal oversight of large financial institutions. The world’s biggest maker of jet engines, power-plant turbines, locomotives and medical imaging equipment fell 10 percent to $12.10, and closed at a two-month low on June 18. GE got 33 percent of its operating profit from its finance unit in 2008.

GE’s General Counsel Brackett Denniston said the company opposes Obama’s proposal, which would bring industrial loan banks, such as the one controlled by GE’s finance unit, under Fed supervision. The changes may force GE Capital to become a bank holding company and separate from the parent, said Adam Steer, an analyst at CreditSights Inc.

Diluting Earnings

E*Trade Financial Corp. fell 36 percent to $1.26 for the biggest decline in the S&P 500. The online brokerage that’s lost money in seven straight quarters sold $478.5 million in stock to replenish capital depleted by bad loans.

U.S. companies are creating equity at the fastest pace on record, causing future earnings to be divided among a larger number of shares. Harman International Industries Inc., the maker of audio equipment, and Marshall & Ilsley Corp., the largest bank in Wisconsin, slumped more than 15 percent this week on share sales. One-hundred seventy-nine U.S. companies have raised $89.7 billion this quarter, according to data compiled by Bloomberg.

Microsoft Corp. rose 3.2 percent to $24.07, an eight-month high, limiting the weekly drop in the Nasdaq Composite Index to 1.7 percent. Goldman Sachs Group Inc. upgraded the world’s biggest software maker to “conviction buy” from “buy,” saying the company may beat profit forecasts.

Spending by Consumers

Earnings of companies in the S&P 500 have dropped for a record seven straight quarters and will continue to fall before rebounding in the fourth quarter, according to analyst estimates compiled by Bloomberg. Companies scheduled to report next week include Oracle Corp., Monsanto Co. and Nike Inc.

Consumer spending in the U.S. probably rose in May for the first time in three months and home sales increased as Americans became more confident the recession will end this year, economists said before reports next week.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: June 20, 2009 08:00 EDT