Stocks Dip as Investors Await Bank Stress Tests

By Alejandro Lazo
Washington Post Staff Writer
Tuesday, May 5, 2009; 4:23 PM

U.S. stock markets ended in the red today as investors showed caution ahead of the government's highly anticipated stress tests for large financial institutions to be released later this week.

The blue-chip Dow Jones industrial average closed down 0.2 percent, or 14 points, while the broader Standard & Poor 500-stock index fell 0.4 percent, or more than 3 points. The tech-heavy Nasdaq lost 0.5 percent, or more than 9 points.

The pullback came after U.S. stock markets were buoyed yesterday by reports showing signs of life in the construction and housing sectors. The S&P 500 crossed into positive territory for the year following that news.

Now traders and other investors are looking toward the release Thursday of the results from the stress tests for large financial institutions that are recipients of government aid. The report is expected to provide details on the U.S. banks that are in need of more capital.

News reports have indicated that Citigroup, Bank of America and Wells Fargo, as well as some regional banks, will be among the group in need of raising more cash. Regulators have pledged additional government funds, if necessary, to ensure that no large institution will fail. Some investors fear the report might reveal that more uncertainty lies ahead for the financial sector.

Federal Reserve Chairman Ben S. Bernanke testified before Capitol Hill this morning on actions the central bank has taken to prop up the economy, saying that the nation's rate of economic contraction might be slowing and that he expects growth to resume this year.

The comments came as a report showed that U.S. service industries contracted in April at their slowest pace in six months. The Institute for Supply Management's index of non-manufacturing businesses rose to 43.7 from 40.8 in March.

"In view of the massive fiscal and monetary stimulus that is being pumped into the economy, and clear signs of improvement in the financial markets and emerging export markets, reduced downward pressure on services activity is expected to continue," Brian Bethune, chief U.S. financial economist at IHS Global Insight, wrote to clients in a note this morning. "Our expectation, nevertheless, is that we are looking at a relatively slow grind out of the current economic contraction, and brief setbacks cannot be ruled out."

Overseas markets were mixed this morning. In Europe, London's benchmark FTSE was up 2.2 percent, or 94 points, while Germany's DAX was down 1 percent, or 49 points. Japan's Nikkei was closed today.

© 2009 The Washington Post Company