Stocks Tumble on Bank Woes

The S&P 500 and Nasdaq each shed over 2% Monday amid more negative news about the financial sector and worries about consumer spending

Well, that didn't last long. Friday's post-holiday rally looked like it would extend into Monday's session. But with the emergence of new concerns about the financial sector, any post-Thanksgiving optimism about the stock market and the economy was cast aside like a leftover mince pie.

On Monday, stocks took another pounding amid growing fears about the economic fallout of the subprime crisis. Some are describing the widespread selling, combined with ongoing dollar weakness and declining interest rates, as a crisis of confidence in the U.S. financial system.

Major U.S. stock indexes erased initial modest gains and traded lower on Monday, once again led by weak financial stocks as investors reacted to news that Goldman Sachs had downgraded HSBC Holdings PLC (HBC) and that Citigroup (C) is planning a second round of layoffs. Keeping to the recent trend in volatile trading sessions, selling accelerated in the final hour leading to the market close.

On Monday, the Dow Jones industrial average ended 237.44 points, or 1.83%, lower at 12,743.44. The broader S&P 500 index skidded 33.48 points, or 2.32%, to 1,407.22. The tech-heavy Nasdaq composite index lost 55.61 points, or 2.14%, to close at 2,540.99. The Dow and S&P indexes are now down 10% from their all-time highs in early October, while the Nasdaq is 11.1% below its 52-week high.

Activity in the broader market was negative on Monday. On the New York Stock Exchange, 25 stocks traded lower for every eight that were gaining ground, while Nasdaq breadth was 22-9 negative. Well-fed investors had earlier appeared to take some encouragement from a reported resurgence of mergers and acquisition activity in Europe and Asia, S&P MarketScope said.

In addition to financial stocks, homebuilders and retailers got hammered. The reports on Black Friday sales have been mixed and concern is mounting about how retailers will fare this holiday season. Despite the fact that this was "Cyber Monday," when many employees return to work after Thanksgiving and kick-off their holiday shopping with online purchases, even online retailers such as Amazon (AMZN) and EBay (EBAY) came under pressure. Online sales on Monday were expected to total more than $700 million, ComScore said.

Homebuilder stocks dropped, led by Standard Pacific (SPF)and KB Home (KBH), after a Citigroup analyst downgraded his short-term outlook on the sector, citing "unprecedented" price/book valuation and volatility levels and the difficulty of calling a market bottom.

Besides second and third helpings of turkey, stuffing and pie, investors were still digesting last week's estimate by the Organization for Economic Cooperation and Development that total losses caused by the subprime crisis could reach $300 billion and that the broader credit crunch could inflict more damage on equity markets. The $300 billion is double the Fed's estimate from earlier this year. Asset writedowns by investment banks and brokerages so far come to roughly $50 billion, while Goldman Sachs predicts the large banks will likely need to write off an additional $48 billion over the next five quarters, according to Ed Yardeni's Morning Briefing.

HSBC Holdings said Monday it will move two of its structured investment vehicles onto its balance sheet to prevent a forced liquidation of "high-quality assets" and provide up to $35 billion in funding. The biggest bank in the United Kingdom by market value said it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold, the Wall Street Journal reported.

Goldman Sachs downgraded HSBC shares to sell from neutral, saying that an additional $12 billion in bad loan provisions is likely needed for the bank's mortgage-related businesses.

HSBC's move "