U.S. Stocks Drop After Goldman Suit, Ending Longest Winning Streak in Year

U.S. stocks fell, halting the longest rally in a year, after allegations of fraud at Goldman Sachs Group Inc. heightened concern the government will crack down on Wall Street and wiped out the week’s advance.

Goldman Sachs sank 10 percent this week, the most since March 2009, after the Securities and Exchange Commission sued the bank and one of its vice presidents for misstating and omitting key facts about a collateralized debt obligation. The 1.6 percent retreat in the Standard & Poor’s 500 Index yesterday erased gains earlier in the week spurred by better-than- estimated results at companies from Intel Corp. to CSX Corp. and JPMorgan Chase & Co.

The S&P 500 slipped 0.2 percent to 1,192.13. Before yesterday, the index was headed for a seventh straight weekly advance, the longest since May 2007. The Dow Jones Industrial Average rose 21.31 points, or 0.2 percent, to 11,018.66. The Russell 2000 Index of small companies jumped 1.7 percent.

“I was very impressed with the earnings we got and the market was doing so well, but then you get a punch in the gut with these Goldman Sachs issues,” said Don Wordell, who oversees the RidgeWorth Mid-Cap Value Equity Fund, which has beaten 97 percent of its peers during the past five years. “It brings investors back to reality. There’s a tremendous amount of skepticism.”

Failure to Disclose

Goldman Sachs, the most profitable firm in Wall Street history, erased its advance for 2010 and ended the week at $160.70, the lowest price since March 3. The SEC said the bank created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them. Goldman Sachs said the claims are “completely unfounded.” Paulson wasn’t accused of wrongdoing.

Google Inc. fell 2.8 percent to $550.15. The owner of the world’s most popular Internet search engine reported profit that missed some analysts’ estimates, underscoring the rising cost of pursuing growth in new markets.

Raw-material producers in the S&P 500 collectively dropped 1.9 percent for the biggest retreat among 10 groups. Alcoa Inc., the largest U.S. aluminum producer, fell 3.3 percent to $13.91 on first-quarter sales that missed the average analyst estimate.

“The key question is: Is this the peak quarter in terms of earnings growth as the comparisons get more difficult as the year proceeds?” said Peter Tuz, president of Chase Investment Counsel, which manages $2.8 billion in Charlottesville, Virginia.

Earnings Season

Microsoft Corp., Apple Inc., Johnson & Johnson and Coca- Cola Co. are among the 129 companies in the S&P 500 scheduled to report quarterly results next week. Total profit for the stock index rose 35 percent during the first three months of the year, according to average analyst estimates compiled by Bloomberg.

Massey Energy Co., which runs a West Virginia coal mine where 29 people were killed in an April 5 explosion, tumbled 9.5 percent to $42.27 after President Barack Obama ordered a crackdown on safety violations nationwide. The decline was the biggest in the S&P 500 after Goldman Sachs.

Intel rallied 6.1 percent, the most since December, to $23.92. The world’s largest chipmaker predicted rising sales this quarter and record profit margins for the year, fueling optimism of a strengthening rebound in technology spending. A measure of computer companies in the S&P 500 climbed 1.4 percent for the biggest gain among 10 main groups in the S&P 500.

CSX Rallies

CSX rose 2.8 percent to $54.44. The third-largest U.S. railroad posted first-quarter profit above the average analyst estimates on increased shipping volumes and more revenue from each carload.

“A lot is already baked in,” said Noman Ali, who manages $3 billion of U.S. stocks at MFC Global Investment Management in Toronto. “Unless companies can beat estimates meaningfully and then raise guidance for the rest of the year, I see the market correcting down because of the strong rally we’ve had year-to- date.”

JPMorgan ended the down 0.9 percent for the week at $45.55. The bank rallied 4.1 percent on April 14 after beating first- quarter profit forecasts and reporting record fixed-income trading revenue. The gains were erased as concern stemming from the SEC lawsuit against Goldman Sachs dragged bank shares lower.

The allegations against Goldman Sachs were announced as Obama tries to pass the most sweeping overhaul of financial regulations since the 1930s. The proposed legislation would mean stronger oversight of derivatives trading and hedge funds, a consumer financial-protection authority and a system for unwinding large systemically important firms when they fail.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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