The Inevitable!

Published: Wednesday, 1 Jun 2011 | 4:00 PM ET
By: Abby Schultz and JeeYeon Park

Stocks sank more than 2 percent Wednesday, following several economic reports that confirmed a struggling recovery and after Moody’s downgraded Greece’s bond ratings deeper into junk status.

The Dow Jones Industrial Average plunged almost 280 points after ending May nearly 2 percent lower.

Financial stocks led the blue-chip index lower, including Bank of America [BAC 11.24 -0.50 (-4.26%) ] and JPMorgan [JPM 41.76 -1.48 (-3.42%) ]. Multinationals Caterpillar [CAT 101.24 -4.56 (-4.31%) ] and Alcoa [AA 16.09 -0.72 (-4.28%) ] also slid on fears of a global slowdown.

The S&P 500 and Nasdaq sank more than 2 percent each. The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged more than 15 percent, to above 17.

The Dow and S&P have seen the biggest drops since August 11, 2010 and are now on pace for a fifth straight week of losses. The Nasdaq saw its worst first day of the month since October 2009. All 10 key S&P 500 sectors dropped, led by financials, materials and industrials.

News that the manufacturing sector was in worse shape than most analysts had thought also sent the yield on the Treasury’s 10-year note to 2.96 percent, its lowest since December 2010.

While the downdraft in the stocks today was sharp, the market remains “very much range-bound,” said Dan McMahon, director of equity trading at Raymond James.

“This is a fairly volatile move the past two days within a range bound market,” McMahon said. (Read More: Economy Falters, Stocks Tank—What’s an Investor to Do?)

Even though the S&P index broke through the 100-day moving average of 1,317, a level it has held since March, McMahon said the selloff won’t mean much unless stocks continue to trade lower, validating the move.

Moody’s cut Greece’s bond ratings by another notch into junk status. In addition to the increased risk of restructuring, the agency cited “highly uncertain” growth prospects and missed targets in budget reforms.

Financials led the markets lower, with the KBW Bank Index [.BKX 48.04 -2.06 (-4.11%) ] sinking to a six-month low and below its 200-day moving average, following more dismal news on the housing market Tuesday when the S&P/Case-Shiller home price index showed home prices fell to a new recession low in the first quarter.

Banks are exposed to the housing market not only through their loan portfolios, but also through holdings of mortgage-backed securities. (Read More: Mortgages Still Cloud Bank of America Outlook)

In further bad news for the housing market, the Mortgage Bankers Association reported its index of mortgage applications fell almost 4 percent last week, led by refinancings, which fell 5.7 percent.

General Motors [GM  30.23  -1.58  (-4.97%)   ], Ford [F  14.23  -0.69  (-4.62%)   ] and Toyota [TM  81.50  -1.79  (-2.15%)   ] slipped after the automakers posted figures that showed a decline in May auto sales. In addition, Toyota said it is recalling 105,000 early models of the Prius because of problems with power steering and the gearbox.

Nokia [NOK  6.69  -0.33  (-4.7%)   ] declined for a second day to a 13-year low after at least eight brokerages cut their price target on the stock. The mobile phone handset maker cut its sales outlook Tuesday and said it expects sales from its products and services to be far worse than initial projections. Research In Motion [RIMM  40.30  -2.55  (-5.95%)   ] also slipped amid worries the Blackberry maker could be in a similar situation.

Juniper [JNPR  32.97  -3.64  (-9.94%)   ] plunged after the CEO said the firm may see a negative impact from the Japanese earthquake and added that the company is not immune to reduced federal spending.

Expedia shares [EXPE  27.80  -0.21  (-0.75%)   ] popped into positive territory following news that deal-of-the-day site Groupon is partnering with the travel website to create a new discount service.

Also on the tech front, Yahoo [YHOO  15.845  -0.705  (-4.26%)   ] slumped despite news the search-engine company said it resolved a dispute with partner Alibaba Group over the Chinese company’s transfer of its prized online payments unit.

Among retailers, Macy’s [M  28.28  -0.60  (-2.08%)   ] slipped even after the department-store chain reported a 7.4 percent gain in May sales, beating the 5.6 percent gain expected by analysts. Most retail outlets are reporting same store sales on Thursday.

Dollar General [DG  31.81  -3.26  (-9.3%)   ] sank after the discount retailer’s earnings fell short of expectations as it needed to cut prices on clothes. And Tiffany’s [TIF  73.38  -2.28  (-3.01%)   ] also sagged after Deutche Bank downgraded the luxury retailer to “hold” from “buy.”

Lions Gate Entertainment [LGF  6.19  0.26  (+4.38%)   ] jumped after the entertainment company beat earnings expectations, helped by lower distribution and marketing costs. Revenues, however, fell short.

On the M&A front, KKR [KKR  17.20  0.01  (+0.06%)   ] said it was selling the principal subsidiary of Hilcorp Resources for $3.5 billion to Marathon Oil [MRO  52.65  -1.52  (-2.81%)   ]. The deal is for 140,000 acres in the Eagle Ford shale field in South Texas.

Sealed Air [SEE  23.84  -1.71  (-6.69%)   ] slipped following news the Bubble Wrap maker will buy Diversey Holdings, a private cleaning product company, for $2.9 billion in cash and stock.

The dollar [.DXY  74.88  0.24  (+0.32%)   ] rose against a basket of currencies. Meanwhile, oil prices declined. U.S. light, sweet crude [CLCV1  100.22  -2.48  (-2.41%)   ] fell $2.41 to settle at $100.29 a barrel, while London Brent crude [LCOCV1  114.50  -2.23  (-1.91%)   ] slipped $2.20 to settle at $114.53 per barrel.

Precious metals closed mixed. Gold rose 0.4 percent to settle at $1,542, while silver fell 1.6 percent to $37.69.

On the economic front, the Institute for Supply Management’s index of manufacturing fell to 53.5 in May from 60.4 in April, the lowest level since September 2009. Analysts expected the index to fall to 57.7.

Construction spending, meanwhile, rose 0.4 percent in April, the Commerce Department reported. But spending in April was revised down to a 0.1 percent gain from the previously reported 1.4 percent gain. Economists surveyed by Reuters had expected construction spending to rise 0.3 percent.

And the private sector added only 38,000 jobs in May, according to a jobs report from Automatic Data Processing and Macroeconomic Advisers, far less than what most analysts had expected. In April, the private sector had gained 177,000 jobs, down from the 179,000 initially reported.

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