By JACK HEALY 5:17 PM ET
Investors pushed the Dow and S.&P. 500 down to 1997 levels as losses piled up in technology and major industrial companies.
Investors called it another day of water-torture declines on Wall Street: drop, drop, drop.
A broad sell-off sent Wall Street staggering lower in the last hour of trading on Monday as the banking system continued to worry investors. The Dow Jones industrial average was down 250.89 points at the close while the Standard & Poor’s 500-stock index, a broader gauge of the market closed at its lowest level since April 1997.
Losses piled up in technology companies like Apple, Google and I.B.M. and industrial companies like DuPont, Caterpillar and the aluminum maker, Alcoa. But in a reversal, battered shares of Citigroup and Bank of America closed higher, and the financial sector fared better than the broader market.
With worries growing about the stability and solvency of the country’s big banks, the Treasury Department tried to reassure jittery investors with a message supporting the financial system and laying out details of the coming “stress tests” of major banks. The message did not calm anyone.
After a brief rise in early trading, stock markets fell into the red and sank lower throughout the afternoon. The Dow Jones industrial average closed down 3.4 percent to 7.114.78 while the broader S. & P. 500 fell 3.47 percent, or 26.72 points, to 743.33. The technology heavy Nasdaq was down 3.7 percent, or 53.51 points, to 1,387.72 as shares of technology companies turned lower.
Shares of Microsoft, Hewlett-Packard and other technology companies fell amid concerns about how the sector would hold up as the economy spins lower. Companies that make basic materials like steel, chemicals and plastic also sank. Crude oil fell $1.59, to $38.44 a barrel, scaling back some recent gains, and gold prices also fell back slightly to $995 an ounce.
The day’s declines continued the downward momentum of a brutal week that sent the major indexes down more than 6 percent. “In lieu of anything the market sees as positive, it’s going to continue its easiest path, and the path it sees is down,” said Joseph Saluzzi, co-head of equity trading at Themis Trading. “That’s where we’re stuck right now, and who’s going to get out in front of it?”
With America’s banking system facing a round of “stress tests,” the prospect of greater governmental control and an uncertain future, the government tried to assure investors early Monday that it would stand behind the banking system, and that it would provide additional temporary aid to banks.
“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth,” the Treasury Department, the Federal Deposit Insurance Corporation and other agencies said in an unusual joint statement. “Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”
The Treasury statement added that major banking institutions were “well capitalized.”
But analysts said investors remained worried about how America’s biggest banks would deal with the troubled assets on their balance sheets, and their prospects for weathering a prolonged economic contraction. Shares of Wells Fargo, Citigroup and Bank of America stayed positive, but other financial companies like Morgan Stanley and Goldman Sachs turned negative.
Analysts said that after fevered speculation last week about bank nationalization, many investors now expect the government to move in that direction, despite statements from the White House supporting a privately held banking system. Stock markets dropped on Friday amid concerns that a broad government takeover could wipe out financial shareholders.
Now, with the government set to begin the “stress tests” on Wednesday, investors want to know which banks will be deemed healthy and which will not, analysts said. Of most pressing concern are big banks including Citigroup, Bank of America, Wells Fargo and JPMorgan Chase, followed by regional chains.
“We need to know how they stand right now,” said Dave Rovelli, managing director of trading at Canaccord Adams. “The uncertainty of waiting for the results of these stress test is just killing the markets.”
Three weeks ago, stock markets tumbled after the Treasury Department announced plans to form a public-private partnership to take troubled mortgage-related assets off the balance sheets of banks. Investors said the government’s plans were short on details and left too much uncertainty about how those assets would be valued, or how private investors would be enticed to bid on them.
The losses on Wall Street came one week after the Dow sank to its lowest levels in six years on growing fears about banks across Europe and the United States.
By the end of trading on Friday, the Dow had tumbled 6.2 percent for the week, its worst since October, and had sunk to its lowest levels in six years. The S. & P. 500 fell 6.5 percent, dropping below 800, but was still slightly above its bear-market lows of Nov. 20.
“The technicians now have control of this market,” said Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research. “People are saying, ‘Where do we go now? We don’t know what’s next.’ ”