Stocks Tumble to 12-Year Lows

Both the Dow and S&P 500 posted their lowest close since 1997 amid anxiety about bank nationalizations and the health of the economy

By Will Andrews and Ben Steverman

U.S. stocks tumbled to their lowest closing levels in over a decade Monday, weighed down by lingering worries about the financial sector and the economy. The sell-off sent the S&P 500 index to its lowest close since April, 1997, and the Dow Jones industrial average to its worst finish since May, 1997.

All in all, just another ugly day on Wall Street.

On Monday, the 30-stock Dow Jones industrial average finished lower by 250.89 points, or 3.41%, at 7,114.78, extending last week's 485-point slide to fresh bear-market lows.

The broad S&P 500 index was down 26.72 points, or 3.47%, at 743.33, undercutting its November closing low of 752.

The tech-heavy Nasdaq composite index shed 53.51 points, or 3.71%, to 1,387.72.

The Dow is down nearly 50% from its all-time closing high of 14,164.53 on October 9, 2007. while the S&P is off nearly 53%.

On the New York Stock Exchange Monday, 27 stocks were lower in price for every four that advanced. Nasdaq breadth was 22-5 negative. Trading was active.

Hewlett-Packard (HPQ), IBM Corp. (IBM) and other tech stocks were among the session's weakest performers. Financials, which had led the market higher at the outset, wound up finishing lower, although Citigroup (C) shares gained nearly 10% on a report the government will boost its stake in the company. But the Treasury Dept. says it prefers banks remain in non-government hands. Observers expect Federal Reserve Chairman Ben Bernanke to be quizzed about the issue by a Senate committee on Tuesday when he delivers his semiannual monetary policy testimony.

Bonds and the dollar index rose amid the stock sell-off. Gold futures were lower on profit taking. Oil futures were lower.

How much lower can stocks go? Todd Salamone of Schaeffer's Investment Research believes the current market dip may be worse than the steep declines in November. Why? "Because there is less fear in the market than there was just three months ago ... Moreover, unlike late 2008, investors have little to look forward to in terms of anticipating positive news, other than comments late last week in which the White House sought to counter rumors of bank nationalization."

Quincy Krosby, chief investment strategist at the Hartford (HIG), says the market's main problem is "festering worries about the banks and lack of a plan" from government officials on a financial rescue. "We’re just getting bits and pieces."

The market slide would stop "if investors heard something coherent from Washington that sounds viable," she says. "At this point, investors are just left waiting. The more you wait, the more you see deterioration of the overall economy."

Obama gathered dozens of advisers and adversaries on Monday to discuss how to curb a burgeoning federal deficit laden with Social Security, Medicare and Medicaid obligations. Reuters reported Obama's summit at the White House today is the first meeting toward a strategy to address the long-term fiscal health of the nation. Obama told the gathering that he will cut the U.S. budget deficit by 2013. He told U.S. state governors at an earlier gathering that stimulus payouts will begin this week.

Obama is set to address a joint session of Congress Tuesday.

According to a Wall Street Journal report, Citigroup is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation. While the talks could fall apart, the government could wind up holding as much as 40% of Citi's common stock. Bank executives hope the stake will be closer to 25%, the Journal's sources said.

Bank of America (BAC) said Sunday that it isn't discussing a larger ownership stake for the government.

The market remains anxious about prospective nationalizations. "The risk is that the current conditions force Geithner’s hand to put together a hurried and less than comprehensive approach," said Daniel Clifton of the Washington consulting firm Strategas. He added: "Without a turnaround in the economy/housing the government will incrementally increase its equity ownership which continues the risk to common and preferred shareholders moving forward."

According to a CNBC report, American International Group (AIG) already 80%-owned by the U.S., is in talks to secure additional government funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history.