U.S. equities were beaten to a pulp on Thursday, plunging after Goldman Sachs (GS) downgraded a handful of high-profile stocks, including General Motors (GM) and Citigroup (C). Oil prices hitting fresh record highs and pessimism about the slowing economy were also were stamping out investor sentiment.
On Thursday, the Dow Jones industrial average fell 298.32 points, or 2.53%, to a nearly two-year low of 11,513.51. The broader Standard & Poor's 500-stock index broke below the key technical support level of 1,300, down 32.44 points, or 2.45%, at 1,289.53. The tech-heavy Nasdaq composite index dropped 69.71 points, or 2.90%, to 2,331.55.
On the New York Stock Exchange, 27 stocks were trading lower for every five that were heading higher, while on the Nasdaq the ratio was 23-6 negative.
Shares of General Motors dropped more than 10% to their lowest level in 53 years after Goldman downgraded the stock to a sell from a neutral rating, citing the need for the automaker to raise capital as it shifts production toward more fuel-efficient vehicles.
Goldman also downgraded its opinion on the entire brokerage group to neutral from attractive, saying it sees no catalysts to send stocks higher over the next few months as economic conditions continue to deteriorate. That pushed shares of Citigroup and Merrill Lynch (MER) lower, too.
"The shrinkage of the financial system is a big deal because the only way out is to raise new capital, which dilutes existing shareholders," says Max Bublitz, chief strategist at SCM Advisors in San Francisco.
With even the most conservative firms having leverage of 10 to 15 times their assets, each writedown of portfolio value means that much less lending investment banks can do, he says. People are wondering who will provide the capital these firms need to stay in business and at what valuation levels they will be attractive to sovereign wealth funds, hedge funds and private equity firms, he adds.
"Both supply and demand for credit are going down at a time when the consumer is hunkering down," he says. "What kind of earnings are these firms going to have?"
A closer focus on that cycle is one reason for the deepening malaise in the market, says Bublitz. Another reason is that investors are starting to grasp the implications for the economy of a retrenchment by consumers, who are under a "full frontal attack" from deteriorating values for their homes and investment portfolios, and higher food and energy prices, he says.
"We might only be in the second inning of a consumer retrenchment and that could play out for a while," he predicts.
Phil Orlando, chief equity market strategist at Federated Investors in New York expects second-quarter earnings for the financial and consumer discretionary sectors to be substantially lower, but says the technology, consumer staple and energy sectors are in fairly good shape.
Research in Motion (RIMM) shares were down 10% and pulling other technology stocks lower on a negative outlook, despite more than doubling first-quarter earnings to 84 cents from 39 cents a year ago on a large revenue increase. The Street was looking for a profit of 86 cents. For the second quarter, Research in Motion expects revenue of $2.55 billion to $2.65 billion and earnings of 84 to 89 cents a share. It also expects a net increase in subscriber accounts of about 2.6 million. JMP Securities reportedly downgraded the stock to market perform from outperform.
Orlando saw the tech selloff stemming not only from Research in Motion but overall concern that the sluggish economy will put second-quarter earnings under pressure and may cause businesses to reduce capital spending on technology.
On the economic data front, gross domestic product for the first quarter was revised higher to 1% from 0.