New York: US stocks slid more than 3% on Monday after weak results from Bank of America reignited concerns over the state of the banking industry and the economy.
Wall Street’s tumble was broad-based and follows a six-week winning streak, the longest for the S&P 500 since 2007, with the Dow scoring its biggest gain over the period since 1938.
Dow component Bank of America shares plunged 24.3% to $8.02 despite reporting a rise in profits. Bank of America’s earnings report raised questions about the sustainability of recent better-than-expected results from banks after the company said its credit quality deteriorated markedly.
“We had started to believe that there was light at the end of the credit crisis tunnel and a lot of the wind got taken out of the sails,” said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York.
The Dow Jones industrial average dropped 289.60 points, or 3.56%, to 7,841.73. The Standard & Poor’s 500 Index tumbled 37.21 points, or 4.28%, to 832.39. The Nasdaq Composite Index fell 64.86 points, or 3.88%, to 1,608.21.
After the closing bell, IBM reported a bigger-than-expected fall in quarterly sales, showing that even one of the healthier U.S. technology companies was being hurt by a slowdown in spending.
IBM’s stock fell 3% to $97.47 in extended-hours trading.
But Texas Instruments shares rose 2.1% after the bell to $17.69 following the tech bellwether’s report of a small quarterly profit and better-than-expected revenue as demand for its chips appeared to stabilize even though it emphasized “caution about the business climate.”
Bank’s credit losses a concern
The sharp sell-off in the regular session was exacerbated by comments from Bank of America Chief Executive Ken Lewis that the already bad credit environment is getting worse.
Energy and commodity shares also fell, with US crude oil futures ending nearly 9% lower amid pressure from economic concerns and a rally in the US dollar on safe-haven bids. The S&P Energy Index dropped 4.4%.
Adding to the bank worry, US government officials have determined they can avoid asking Congress for more bank bailout funds by converting the existing loans to some US banks into common stock, the New York Times reported. Such a move would dilute stockholders’ stakes.
Shares of Citigroup Inc lost 19.5% to $2.94 after Goldman Sachs analysts said credit losses at the bank continued to grow at a rapid rate and estimated the bank’s underlying first-quarter loss was 38 cents a share.
The KBW bank index tumbled 15.4%.
Fueling more bank concerns were comments from J P Morgan Securities, which said it estimates US banks to incur $400 billion more in losses from the credit crisis and expects there will be a need for more capital for certain institutions.
The US Treasury also said on Monday that there was “no basis” for a report that showed its “stress tests” on the health of the nation’s top 19 banks showed several were “technically insolvent.”
The major indexes suffered their worst performance on a percentage basis since 5 March. But the S&P 500 remains up 23% from the bear market closing low on 9 March, with that advance spurred by some positive comments from banks and hopes that data signaled the economic slump may be moderating.
Adding to the negative tone, US President Barack Obama said over the weekend the economy remains under strain and his top economic adviser tempered hopes for a speedy recovery.
On the merger front, Oracle Corp said it would buy Sun Microsystems Inc for about $7.4 billion after Sun’s talks with IBM broke down earlier this month.
Oracle shares shed 1.3% to $18.82, while Sun, the high-end computer server and software maker, surged 37% to $9.15.
Trading was active on the New York Stock Exchange, with about 1.76 billion shares changing hands, above last year’s estimated daily average of 1.49 billion, while on Nasdaq, about 3.08 billion shares traded, well above last year’s daily average of 2.28 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of more than 9 to 1, while on the Nasdaq, more than five stocks fell for every one that rose.