Financial shares led the stock market lower on Friday after federal regulators filed civil fraud charges against Goldman Sachs over its dealings in the subprime mortgage market. Analysts say the market was poised to fall after a steady run of gains in the past two months, and the Goldman news gives investors that reason to sell and take some profits.
Stocks were already lower before news of the Securities and Exchange Commission's charges against the leading investment bank. Investors were disappointed after Google reported earnings that didn't live up to forecasts.
General Electric Inc. and Bank of America Corp. also reported profits that topped forecasts, but their stocks still fell. GE's revenue came up short of expectations, while Bank of America said loan losses remain high.
The SEC charged Goldman and one of its vice presidents with failing to disclose key information to investors regarding complex mortgage-backed securities in 2007, just as the US housing market was beginning to weaken.
"It's all a knee-jerk reaction to Goldman," Steven Goldman, chief market strategist, Weeden & Co., said of the market's tumble. "You're seeing a pullback, but nothing of significant consequence."
The charges come as the Obama administration seeks greater regulation of the nation's banks and their trading of exotic securities like those involved in the Goldman case. These kinds of investments are widely seen as one of the triggers of the financial crisis that crippled the nation's financial system in the fall of 2008.
Economic news on the housing front provided little help to the market. The Commerce Department said housing construction rose to a 16-month high in March. However, construction of single-family homes, the most important segment of the market, fell. Economists are also concerned about continued hurdles in the housing market, like rising mortgage rates and the impending end of a homebuyer tax credit.
A separate report showed consumer sentiment fell this month. Friday's pullback comes after six straight days of gains that pushed the Dow Jones industrial average to its highest close in 18 months. Stocks have been steadily rising in recent months on growing signs that the economy is recovering, albeit slowly. In early afternoon trading, the Dow fell 124.02, or 1.1 per cent to 11,020.55. The Standard & Poor's 500 index dropped 19.44, or 1.6 per cent, to 1,192.23, while the Nasdaq composite index fell 35.66, or 1.4 per cent, to 2,480.03.
About five stocks fell for every one that rose on the New York Stock Exchange on the New York Stock Exchange, where volume came to 776.8 million shares, compared with 439.7 million traded at the same point Thursday.
The Chicago Board Options Exchange's Volatility Index, known as the market's fear gauge, spiked 19 per cent to 18.95 after the Goldman charges. Its at its highest level in more than a month. Both Bank of America and General Electric's first-quarter results follow a trend that has taken hold throughout the week of companies topping earnings forecasts.
GE said losses are beginning to moderate in its battered lending division, GE Capital. But its revenue did fall short or expectations, which has been hurting the stock.
Bank of America said strong trading revenue helped offset ongoing consumer loan losses. However, it did note those loan losses _ which have cost banks hundreds of billions of dollars _ are starting to ease.
Goldman Sachs shares fell $23.20, or 12.6 per cent, to $161.07 in heavy trading. Bank of America shares fell 92 cents, or 4.7 per cent, to $18.56.
GE shares fell 67 cents, or 3.4 per cent, to $18.84. Google shares fell $37.80, or 6.4 per cent, to $557.50, even though its profit also beat analysts' estimates.
Earlier, the Commerce Department said construction rose 1.6 per cent to a seasonally adjusted annual rate of 626,000 last month. Economists polled by Thomson Reuters had forecast construction would rise to 610,000 units.
Applications for building permits, considered a good gauge of future activity, rose to an annual rate of 685,000. Economists were expecting applications to rise to 630,000.
Also, a Reuters/University of Michigan's consumer sentiment reading fell unexpectedly.
With stocks reeling, investors moved into the safety of Treasury bonds. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.77 per cent from 3.84 per cent late Thursday.
The dollar mostly rose against other major currencies. Gold and oil both fell.
The Russell 2000 index of smaller companies fell 8.97, or 1.2 per cent, to 715.24.