Stocks fall in early trading after six-week surge

NEW YORK —  The stock market’s booming six-week rally ran smack into the head winds of a still-weak economy.

Share prices skidded Monday on concern that consumer-loan losses stemming from the soft housing and employment markets could delay a long-awaited bank recovery.

The Dow Jones industrial average sank almost 300 points as investors expressed disappointment with Bank of America’s sobering first-quarter earnings. The Dow’s 3.6% fall marked the biggest one-day drop since the blue-chip gauge hit a 12-year low March 9.

The broader Standard & Poor’s 500 index fell 4.3%, also the most since March 9.

The announcements of corporate takeovers carrying price tags totaling $16 billion -- including Oracle’s agreement to pay $7.4 billion in cash for Sun Microsystems -- failed to stem the market’s decline, even though acquisitions are usually seen as a bullish indicator for stocks.

Many analysts had expected the recent stock rally to give way as investors awaited signs about whether the economy was truly recovering.

“People are wondering what is left to push [the market] higher,” said Sam Stovall, chief investment strategist at Standard & Poor’s Corp.

Investors are worried that the strong earnings reported by several major banks over the last two weeks were largely the result of favorable accounting rules and unsustainable strength in the banks’ bond trading operations, not the result of stability in core lending operations.

“There’s growing skepticism that most of the gains we’re seeing in the bank sector are illusory,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago, diagnosing “a one-time-gain syndrome.”

Bank of America’s $4.2-billion profit surpassed Wall Street expectations but only by relying on a series of one-time gains. The bank set aside on its books $13.4 billion to cover future credit losses, more than double the provision it made a year earlier. Such provisions count against profit as soon as they are made.

The company also wrote off as uncollectable $6.9 billion in loans. And its huge credit-card unit lost $1.8 billion.

The company’s shares skidded $2.58, or 24%, to $8.02. An index of 24 bank stocks sank 15%.

“Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened,” Bank of America said.

That sober assessment helped lead investors to consider whether the recent rally -- initially triggered by upbeat comments by bank executives -- had gone too far.

The mood was darkened further by research reports predicting more tough times for banks.

Goldman Sachs analyst Richard Ramsden, for example, made the case that Citigroup’s first-quarter earnings released Friday were weaker than they appeared. Citigroup shares lost 19%.

“Credit losses, which we see as critical in drawing a line in stabilizing Citi’s capital base, continue to grow at a rapid rate,” Ramsden said.

A JPMorgan Chase analyst said banks might incur an additional $400 billion in losses on toxic assets, forcing them to accept more money from the government.

Even if the worst is over for banks, the extent of their recession-related losses isn’t yet known.

“It’s going to be a quarter-by-quarter long slog back to consistent profitability,” independent banking analyst Nancy Bush said.

The Dow fell back below 8,000, shedding 289.60 points to 7,841.73. The S&P; 500 index dropped 37.21 points to 832.39.

The Nasdaq composite index tumbled 64.86 points, or 3.9%, to 1,608.21. Shares of Sun Microsystems spurted 37% after word that it would be acquired by Oracle for $7.4 billion.

Concern about the economy also was shown in the commodity market. Crude oil tumbled $4.43, or 8.8%, to $45.88 a barrel, its lowest close since March 11.

Meanwhile, an index of leading U.S. indicators, thought to foreshadow the direction of the economy over the next three to six months, fell 0.3% last month, more than expected, the Conference Board reported Monday.

That undercut recent optimism from market bulls who have seized on scattered signs of economic improvement to argue that a new bull market is taking hold.

Overseas, key European stock markets fell 3% to 4%. Earlier in the day, Asian markets recorded modest gains.

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