Stocks fell hard Thursday to open what has been the traditional year-end rally period, as fresh doubts about the health of major banks spooked investors.
The Dow Jones industrial average plummeted 362.14 points, or 2.6 percent, to 13,567.87, the fourth-biggest percentage decline this year and nearly equal to the percentage drop Oct. 19 that was sparked by corporate profit worries. It was the Dow’s worst performance on the first trading day of November since 1932, according to the Stock Trader’s Almanac.
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Citigroup was the biggest percentage loser in the 30-stock Dow on Thursday, dropping $2.85, or nearly 7 percent, to $38.51.
Banking stocks “were the catalyst for today,” said James McDonald, director of equity research for Northern Trust. The KBW index of 24 major banks fell more than 5 percent, the biggest one-day percentage drop this year.
McDonald cited news stories Thursday about the exodus of two key Citigroup officials, who ran units linked to exotic debt instruments that have run aground at many major banks.
“That reignited people’s concerns about the credit markets,” McDonald said.
An analyst at CIBC Capital Markets cut her investment rating on Citigroup, the nation’s largest bank, to “underperform” and speculated that the bank might have to reduce its quarterly dividend, now at 54 cents a share, to bolster its capital.
Prospects of a crisis at a multinational banking firm have loomed over Wall Street since the credit crunch emerged in August.
“I don’t think it’s worry that a specific large bank will fail,” McDonald said. “I think the odds of that are very low. But the risk is that the losses in the larger financial institutions become significant enough that they continue to pull back from lending.”
Ironically, concern that handicapped bank lending was wounding the economy came on the eve of Friday’s scheduled October jobs report, which analysts speculated could be stronger than the average forecast of economists.
Surveys of economists by wire services indicated that the economy created 80,000 to 100,000 jobs last month. But data released Wednesday by payroll administrator Automatic Data Processing indicated there is a good chance the number could be higher, dispelling fears of a recession.
On Wednesday the Commerce Department reported stronger-than-expected economic growth in the third quarter and the Federal Reserve warned of inflationary pressures amid continuing economic growth.
Nonetheless, the stock market’s nerves have been raw since August, mostly because no reliable accounting has been made of hundreds of billions of dollars in bad debts held by major banks in off-balance-sheet entities called structured investment vehicles, or SIVs.
Banks, including Citigroup, created SIVs to hold debt securities and to borrow against those securities to magnify the quest for high-yield investments for clients. In many cases the high-yield instruments were backed by subprime mortgages.
As the subprime mortgage market sank, three major banks — Citigroup, JPMorgan Chase and Bank of America — began working with the Treasury Department to establish yet another SIV, dubbed Super SIV. The Super SIV, which is still being organized and funded, would bid for loans held by existing bank SIVs in an effort to prevent a meltdown in the entities.
“We’re going to have periods of rockiness through the fourth quarter as investors worry about the resolution of the SIVs,” said McDonald.
Thursday’s slump was widespread. Only three of 147 industry sectors in the Standard & Poor’s 500 index advanced.
Software giant Microsoft was the only component of the Dow to close higher. But information technology stocks in general were caught in the slide, which intensified near the close of trading.
“People were buying Nasdaq and tech stocks, but they all got flushed with the Dow,” said Fane Lozman, chairman of Scanshift.
In particular, shares of Internet search service Google, which has been wildly popular this year, reached a fresh record high of $713.72 during the Nasdaq session, but closed down $3.79, at $703.21.
Basic materials stocks and energy stocks, which have been major winners this year, also succumbed to Thursday’s sell-off. Exxon Mobil dropped $3.49, or nearly 4 percent, to $88.50, after the oil giant posted an unexpected decline in third-quarter profits.
In futures trading, highflying commodity prices fell broadly, led by declines in wheat, copper and soybeans, according to the Dow Jones/AIG commodity index.
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