U.S. stocks tumbled, sending the Dow Jones Industrial Average to the lowest level since September, as banks slumped on concern that Europe will fail to contain its debt crisis and that the economy is faltering.
All 10 groups in the Standard & Poor’s 500 Index fell at least 2 percent. Bank of America Corp. and Citigroup Inc. dropped more than 10 percent, pacing losses in financial shares, as the costs to protect the government debt of Greece, Italy, Spain and France rose. Walt Disney Co., the largest theme-park company, tumbled 9.1 percent on concerns that the slowing economy and consumer confidence may hurt its businesses.
The S&P 500 fell 4.4 percent to 1,120.76 at 4 p.m. in New York. The benchmark gauge jumped 4.7 percent yesterday as the Federal Reserve said it would keep borrowing costs at an all-time low and was prepared to use a range of tools to bolster the economy. The Dow declined 519.83 points, or 4.6 percent, to 10,719.94. About 15 billion shares changed hands at 4:15 p.m., almost twice the three-month average, Bloomberg data show.
“The message is that the market is concerned about the financial industry,” Kevin Caron, market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., said in a telephone interview. His firm has $115 billion in client assets. “The banks are exposed to a deteriorating economy. The European debt crisis has a whole set of issues. The concern is about a spillover effect of that.”
Europe Debt Concern
The S&P 500 has fallen 18 percent from this year’s high on April 29 on concern about Europe’s debt crisis and a political battle over the U.S. debt ceiling that prompted S&P to cut the country’s credit rating. Both European shares and the Russell 2000 Index of small companies entered a so-called bear market this week, falling at least 20 percent from their previous highs. Yesterday’s gain in the S&P 500 pared a 6.7 percent slide on Aug. 8 following the cut of the U.S. credit rating.
Stocks fell across the globe today as the benchmark Stoxx Europe 600 Index lost 3.8 percent to 223.50. A gauge of European banks tumbled 6.7 percent. BNP Paribas SA options prices rose to the highest level since at least 2005 and Societe Generale SA’s reached a two-year high as the cost of insuring French government bonds increased. The shares plunged.
France’s top credit grade was affirmed by S&P, Moody’s Investors Service and Fitch Ratings as yields on the nation’s debt climbed on concern that Europe’s sovereign debt crisis is intensifying.
“European banks are putting pressure on stocks,” Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “The focus still remains over there, even if it had shifted a bit to the debt-ceiling concern in the U.S. It’s not a concern that the banks are going out of business. It’s just a concern that the cost of operation is going up. We’ve been watching financial stocks getting killed over here.”
The KBW Bank Index of 24 stocks slumped 8.2 percent. Banks, insurers, brokerages and investment firms in the S&P 500 led gains yesterday, jumping 8.2 percent.
Stocks briefly pared losses after Bank of America’s Chief Executive Officer Brian T. Moynihan said he is comfortable with the company’s capital. “The fundamentals are so much better in our country and in our company and in our industry than they were four years ago, when the financial crisis hit,” Moynihan said today during a conference call hosted by mutual fund manager Bruce Berkowitz.
Bank of America dropped 11 percent to $6.77, extending its decline for the year to 49 percent. Citigroup Inc. retreated 10 percent to $28.49.
Treasuries rose, pushing yields on two- and 10-year notes toward record lows reached yesterday. Gold rallied to a record for a third straight day. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 23 percent to 42.99, after tumbling 27 percent yesterday.
Companies whose earnings are most-dependent on economic growth also helped lead the declines in the S&P 500. The Morgan Stanley Cyclical Index of 30 stocks slid 4.7 percent.
Walt Disney plunged 9.1 percent, the most since 2008, to $31.54. Wunderlich Securities cut its rating on the stock to “hold” from “buy” following its quarterly earnings report. TV station advertising sales are down by a mid-single digit percentage this quarter, the company said yesterday on a conference call after the market closed. Net income rose 11 percent to $1.48 billion, or 77 cents a share, in the period ended July 2.
The 2.28 percent dividend yield of S&P 500 companies topped the 2.11 percent yield of 10-year Treasury notes for the first time since May 2009, according to data compiled by Bloomberg. While the likelihood that the U.S. economy will contract is low, investors should buy stocks with dividend yields that are higher than the 10-year Treasury yield and have strong earnings growth until equity markets recover, Thomas J. Lee, the New York-based chief U.S. equity strategist at JPMorgan Chase & Co. wrote yesterday.
U.S. stocks most-tied to the economy will perform better than the overall market as profit growth in the S&P 500 is fueled by global demand, according to Bank of America Corp.
David Bianco, the New York-based head of U.S. equity strategy at the firm, lifted his ratings for energy, materials and industrial stocks to “overweight” from “market weight.” He maintained his “overweight” on technology companies. He cut his recommendations for consumer and health-care stocks to “underweight,” citing a government-spending drop and weak consumption, and he has an “underweight” rating on telecommunications companies.
Bianco raised his rating for utility companies to “market weight” from “underweight,” saying that’s his “preferred defensive sector” because of low risk and high dividend yields. He kept his “market weight” recommendation for financial stocks and noted that the group may catch up to the rest of the market in the rest of the year if the S&P 500 has a strong rally.
Bianco forecasts the benchmark measure for U.S. stocks will climb to 1,400 by the end of 2011, higher than the 1,389 average estimate of 13 strategists surveyed by Bloomberg News.