Stocks and Bonds
Wall Street’s Win Streak Ends at 6
By JAVIER C. HERNANDEZ
Wall Street seemed headed for another strong weekly finish on Friday — and then the news hit.
Jin Lee/Bloomberg News
Traders on Friday on the floor of the New York Stock Exchange. Stocks stumbled after the Securities and Exchange Commission accused Goldman Sachs of fraud.
Stocks fell by the largest amount in two months after the Securities and Exchange Commission accused Goldman Sachs of fraud in mortgage investments. By day’s end, the banking sector was left gasping for air: Goldman dropped nearly 13 percent; Morgan Stanley, 5.6 percent; Bank of America, 5.5 percent; Citigroup, 5.2 percent.
Investors were nervous that the renewed scrutiny on Goldman could strengthen efforts by the government to overhaul Wall Street regulation, crimping the banks’ profits and limiting their ability to lend in a fragile economy.
“This may just be the opening salvo,” said Joseph V. Battipaglia, a market strategist for Stifel Nicolaus.
The S.E.C.’s lawsuit accused Goldman of creating mortgage investments that were made to fail. That revelation stirred concern among investors that banks may still be relying on high-risk trading practices that helped bring about the financial crisis.
“There is a worry that there may be a pattern of this unsavory activity that is not in the best interest of the free market or investors,” said Jeffrey A. Hirsch, editor of The Stock Trader’s Almanac. He said the jolt to the banking sector could prompt skepticism about the market’s direction and cause stocks to fall sharply this year, perhaps by as much as 30 percent, before climbing again.
At the close, the Dow Jones industrial average was down 125.91 points, or 1.13 percent, at 11,018.66, after dropping by more than 150 points earlier in the session. The Standard & Poor’s 500-stock index declined 19.54 points, or 1.61 percent, to 1,192.13. The Nasdaq fell 34.43 points, or 1.37 percent, to 2,481.26.
As investors fled stocks, the dollar and Treasury bonds strengthened, and the price of oil, gold, and copper fell. The Treasury’s benchmark 10-year note rose 17/32, to 98 27/32, and the yield fell to 3.76 percent from 3.83 percent late Thursday.
The steep losses came as a shock to a market that has been riding a wave of enthusiasm recently. The Dow has risen for seven consecutive weeks, and on Monday it closed above the 11,000 mark for the first time since the beginning of the financial crisis.
Signs of strength in consumer spending and sectors like manufacturing have strengthened a sense that a recovery is at hand, helping sustain Wall Street’s 13-month rally.
But with first-quarter earnings results trickling out, expectations have proved to be extraordinarily high. Investors seem more interested in the outlook for profits for the rest of the year than glittering quarterly results.
Case in point: Google reported robust results after the market closed on Thursday — net income rose more than 37 percent — but Wall Street bristled. The company’s stock fell 7.6 percent, to $550.31 a share, as investors remained concerned its profit would disappoint this year.
General Electric also reported first-quarter results that beat expectations, and the company’s executives offered a brighter outlook for the rest of the year. But its stock fell 2.7 percent, to $18.97.
Adding to Friday’s pessimism, a report showed that consumer sentiment fell to the lowest level in five months in April. That clashed with recent signs that Americans were beginning to spend more freely and a broader sense that the recovery was gaining steam.
In the near term, analysts said the focus would remain on the financial sector, which has driven much of the momentum in the stock market over the last year as interest rates have remained near zero, making borrowing cheap.
A central concern is the uncertainty surrounding Washington’s plan to overhaul financial oversight. On Friday, Lawrence H. Summers, President Obama’s top economic adviser, said that he expected financial regulation legislation to pass by June, according to Bloomberg News. That could place limits on derivatives trading, which has proven lucrative for commercial banks.
The unease has spread to all types of financial firms. Shares of regional banks fell on Friday amid worries that businesses could encounter difficulty obtaining capital from large banks if Washington required them to hold more in reserves. That contraction could weigh on local economies and hurt community banks.
William T. Fitzpatrick, an analyst for Optique Capital Management, said large banks were particularly vulnerable to stock declines because of their remarkable performance over the last year.
Bank of America, for instance, reported sterling first-quarter results on Friday, but its stock fell in part out of concern it might be overpriced given the economic outlook, Mr. Fitzpatrick said.
“Goldman was certainly just one of the many options that could trigger a sell-off,” Mr. Fitzpatrick said. “Financials were susceptible to something like this.”
Without a potent rally in the banking sector, analysts say the market may have difficulty sustaining its momentum.
“As big banks go,” Mr. Fitzpatrick said, “so goes the rest of the economy.”
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