Dow drops 362 on investor worries

NEW YORK â€”  A day after greeting the Federal Reserve’s interest-rate cut with a sharp afternoon rally, investors gave it all back -- and then some -- on Thursday, sending stocks tumbling with financial stocks leading the way.

The Dow Jones industrial average sank 362.14 points, or 2.5%, to 13,567.87. Of the Dow’s 30 stocks, only one -- Microsoft -- finished in positive territory.

The broader Standard & Poor’s 500 index was down 40.94, or 2.6%, to 1,508.44.

All sectors showed losses, even technology, which had been holding up well lately. The tech-heavy Nasdaq composite index dropped 64.29, or 2.2%, to 2,794.83.

Thursday’s plunge showed a bit of sobriety from a stock market that had been in denial for months, repeatedly bouncing back from bad news to approach new highs, said Joseph Battipaglia, strategist at Stifel, Nicolaus & Co.

“The fundamentals of the American economy are deteriorating,� he said. “Housing is in recession, autos are flat and starting to trend lower, consumer spending is slowing. Yet the stock market has been waiting for the Hail Mary pass from the Fed.�

The Fed came through Wednesday with a quarter-percentage-point cut in its benchmark interest rate, but the central bank also strongly hinted that it was through cutting for the time being. Thursday’s market reaction may have reflected a realization on Wall Street’s part that there is only so much the Fed is willing to do, and indeed only so much it can do, Battipaglia said.

Thursday’s big losers, as usual lately, were financial stocks. The financial-services sector of the S&P; 500 sank 4.6% -- the category’s worst one-day performance in five years -- after three analysts downgraded Citigroup.

One of those analysts, Meredith Whitney at CIBC World Markets, said the nation’s largest banking company might have to cut its dividend to raise capital in the wake of billions of dollars in write-downs and losses stemming from the sub-prime mortgage crisis and resulting credit crunch.

The downgrades partly reflect fears that Citigroup’s exposure to mortgage-backed and asset-backed securities will result in deeper losses than expected, said Hugh Johnson, chairman of Albany, N.Y.-based money manager Johnson Illington Advisors. That kind of damage would hardly be limited to Citigroup, he said.

“The market is telling us that it’s too early to say our problems are behind us,� Johnson said.

Citigroup shares tumbled $2.85, or 7%, to $38.51. Other well-known financial names also fell hard. Bank of America dropped 5.3%, Washington Mutual sank 7.6%, Wells Fargo fell 5.6% and Santa Monica-based FirstFed Financial slumped 7.3%.

Mortgage giant Countrywide Financial skidded $1.09, or 7%, to $14.43. The stock is down 66% year to date.

Stock market worries caused investors to crowd into the perceived safety of Treasury securities, driving down yields.

The yield on the two-year Treasury note fell to 3.76% from 3.95%. The benchmark 10-year Treasury note dropped to 4.35% from 4.47% late Wednesday.

The dollar was mixed against major currencies. Gold futures fell $1.30, to $790.70 an ounce.

A couple of reports showing economic weakness gave stock investors pause Thursday.

A survey of purchasing managers suggested that manufacturing grew in October at its slowest pace in seven months, and the government said consumer spending inched up 0.3% in September, less than expected and the smallest rise in three months.

A key report on the economy is due today, when the government gives its estimate of the net number of jobs the economy created -- or lost -- in October.

Stock market bulls are counting on continuing job growth to make the case that the economy overall is in decent shape and will continue to expand, in turn underpinning corporate earnings growth.

For years, strong company profits have been Exhibit A in the bullish case for stocks, but earnings of the companies in the S&P; 500 are poised for their first decline since the first quarter of 2002, according to John Butters, director of earnings at data tracker Thomson Financial in Boston.

With about 80% of the S&P; 500 companies having reported their third-quarter results, Butters said, the latest estimate, based on analysts’ reports, is that profits overall were off 1.7% from a year earlier.

The fourth-quarter forecast is for a return to strongly positive growth, Butters said, although analysts have trimmed their estimated average increase to 9% from 11.5% on Oct. 1.

Battipaglia, who puts the odds of a recession next year at 50-50, said the strong fourth-quarter estimate underlined the stubbornness of Wall Street’s optimism in the face of ample evidence of a souring economy.

In other market highlights:

* Declining issues outnumbered advancers by 4 to 1 on the New York Stock Exchange.

* The Russell 2,000 index of smaller-company stocks was down 32.84 points, or 4%, to 795.18.

* European stock indexes tumbled with the U.S. market, losing 2.2% in Britain, 1.8% in Germany and 2.1% in France.

* Oil futures fell from a record high, dropping $1.04 to $93.49 a barrel in New York.

* Las Vegas Sands plunged 15% in after-hours trading after the company posted a $48.5-million third-quarter loss attributed to high costs to open its megaresort in Macao and an unlucky run in the company’s casinos.

* Crocs plummeted $27.01, or 36%, to $47.74 after the shoe maker’s earnings fell short of expectations.

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