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Stocks end worst week of the year

The sell-off Friday wiped out most of the gains registered a day earlier and fed the perception among many on Wall Street that share prices could be poised for a deeper decline.

April 13, 2012|By Walter Hamilton and E. Scott Reckard, Los Angeles Times
  • New York Stock Exchange Governor Nicholas Briganti, center, works with traders on the NYSE floor
New York Stock Exchange Governor Nicholas Briganti, center, works with… (Richard Drew, Associated…)

The stock market hit its first rough patch of 2012, closing out its worst week of the year with a sharp decline.

Professional investors struggled to determine whether the market's recent bout of weakness was nearing an end or signaling a larger slump. The indecision shaved nearly 137 points off the Dow Jones industrial average Friday, with much of the drop coming in the final hour of trading.

The sell-off wiped out most of the gains registered a day earlier and fed the perception among many on Wall Street that share prices could be poised for a deeper decline.

"I don't think the market is going to get destroyed, but it's still vulnerable to a setback of what could be 7% to 10% from the highs," said Rick Bensignor, chief market strategist at Merlin Securities.

Volatility, the market's chronic nemesis last year, is threatening to return. The Dow has swung by triple digits on four of the last five days and on five of the last seven days. Share prices fell all but once.

After getting off to their best start in 14 years in the first quarter, stocks are being hampered by a glass-half-empty mentality.

The economic optimism that reigned during the first quarter has been supplanted with a nagging sense that stock prices rose too high as soft U.S. employment, slowing growth in China and the latest flare-up in the European debt crisis pose significant threats.

"The market is ready for a little bit of a breather," said Scott Wren, senior equity strategist at Wells Fargo Advisors. "The market has gotten ahead of the fundamentals, at least for this early in the year."

The Dow skidded 136.99 points, or 1.1%, to 12,849.59. The index fell 1.6% on the week and is down 3.1% from its April 2 high.

Broader indexes are tracing similar arcs. The Standard & Poor's 500 sagged 17.31 points, or 1.3%, to 1,370.26. The Nasdaq composite fell 44.22 points, or 1.5%, to 3,011.33.

Wren and other market experts think the S&P could fall to 1,300 or a bit lower, meaning an additional decline of 5% to 7%.

Overseas markets, especially in Europe, have been hit harder. Spanish stocks fell to their lowest level in three years. Even in Germany, Europe's fiscally strongest country, share prices have dropped 8% in the last month.

Investors were disappointed by last week's jobs report, which showed only 120,000 net new jobs being created last month. That's been exacerbated by the sense that the Federal Reserve is unlikely to launch a third round of bond buying, known as quantitative easing, to stimulate growth any time soon.

And the rest of the world isn't helping.

China announced late Thursday that its economy expanded 8.1% last year, a home run compared with the developed world but less than market watchers had expected.

In Europe, investors feared that deep austerity measures to cut government spending could cripple economies in Spain and Italy and prevent them from meeting their heavy debt obligations. The yield on 10-year Spanish government bonds rose to 5.98% on Friday, just shy of the highest level this year.

Experts doubted U.S. share prices would fall into a prolonged funk because general trends still tilt the market's way, including the belief that the Federal Reserve would step in with a third round of bond-buying, should economic conditions deteriorate significantly.

Still, even seemingly good news, such as better-than-expected corporate earnings, have not been an elixir.

A pair of large banks, JP Morgan Chase & Co. and Wells Fargo & Co., reported better-than-expected first-quarter earnings Friday, with strong mortgage and investment banking operations boosting fourth-quarter results. But their shares declined anyway.

As the U.S. economy stabilized, both banks continued to release money they previously had set aside to cover loan losses — $400 million at Wells during the quarter and $1.8 billion at JPMorgan Chase.

JPMorgan, which operates the largest U.S. bank as Chase, earned $5.4 billion, down from a record $5.6 billion a year earlier. The profit amounted to $1.31 a share, a higher amount than the $1.28 a share in last year's first quarter, but only because it has been buying back its stock. Analysts had expected earnings of $1.15 a share. Revenue rose 6% to $27.4 billion, beating Wall Street's expectations by $3 billion.

Wells earned $4.3 billion, or 75 cents a share, up from $3.8 billion, or 67 cents a share, a year earlier. Analysts had expected 73 cents a share. Revenue rose 6.4% to $21.6 billion at the San Francisco bank, with half of the increase coming from mortgage operations.

Both banks benefited from record low mortgage interest rates, which drove hordes of borrowers back for refinancings. JPMorgan said it wrote 6% more home loans during the quarter, with applications up 33%. Wells Fargo, the largest mortgage lender, originated 54% more home loans, with applications up by 84%.

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