Stocks Fall As Firms Warn of Turmoil

By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, April 21, 2009

U.S. stock markets plunged yesterday after several major firms cautioned that the recession continues to weigh on their businesses, prompting investors to lock in profits from the past month's rally.

The Dow Jones industrial average fell 3.6 percent, or 289.60 points, to 7841.73. The broader Standard & Poor's 500-stock index dropped 4.3 percent, or 37.21 points, to 832.39, while the tech-heavy Nasdaq composite index was down 3.9 percent, or 64.86 points, to 1608.21.

Stocks have rallied in recent weeks after hitting historic lows in March. The S&P has risen for six consecutive weeks, the longest run in two years. But the sell-off yesterday signaled that many investors remain skeptical that the economy has turned the corner. A report yesterday by the Conference Board showed that leading economic indicators fell 0.3 percent in March, the ninth consecutive decline.

"It's a question of still some uncertainties out there, and that's causing investors to take a more cautious outlook," said Peter Cardillo, chief market economist with Avalon Partners in New York.

Bank of America reported profit of $4.25 billion during the first quarter, 3 1/2 times what it made in last year's first quarter. The company attributed the gains to trading in financial products and a rush to refinance homes as interest rates drop. But the bank also warned that the economy continues to face "extremely difficult challenges" as the unemployment rate rises. Bank of America's stock fell 24 percent, or $2.58, to $8.02.

The news dragged down the rest of the financial sector, which fell 6.6 percent. Citigroup plummeted 19 percent, while Wells Fargo fell 16 percent. J.P. Morgan Chase dropped 11 percent.

"The news from Bank of America really hit investors over the head with a cold shower that there are still some banks that are going to have troubles," said Len Blum, managing director for Westwood Capital. "Credit losses aren't over."

Larry Smith, chief investment officer at Third Wave Global, said investors should expect volatility, particularly in financial stocks, as the markets digest the rapid gains of the past month. But he said the worst is over. "I don't think we're returning back to the type of scenario that people are referring to as a meltdown."

Other companies reporting earnings yesterday included the pharmaceutical company Eli Lilly, which announced that first-quarter profit rose 23 percent, to $1.3 billion, beating analysts' expectations. Its stock closed down 2.3 percent. The energy firm Halliburton edged up 0.1 percent after reporting a 35 percent drop in earnings. The company said profit was affected by severance packages for employees.

Tech stocks were also big movers yesterday. Oracle announced a $7.4 billion deal to buy Sun Microsystems after IBM abandoned its bid for the software company. Sun's stock shot up 37 percent, to $9.15, in heavy trading. Oracle, however, fell 1.3 percent, to $18.82. The technology sector was down 3.5 percent for the day.

"The more merger activity that we see going forward," Smith said, "the better it will be for the equity markets."

Stocks also slid in Japan, with the Nikkei 225 down as much as 3 percent during morning trading.

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