S&P 500 reverses, ends negative after bank unit selloff report

on January 26 2010 7:06 PM

The financial sector led a stock market drop in late trading today, after expectations that new government policies could force major banks to divest themselves of some of their operations.

The S&P 500 Index slipped into negative territory to end with a 4.6 loss after a 6.6 point gain earlier in the session.

The retail sector, which led the rally this morning, managed to hold on to most of its gains.

Asian markets closed down today on new evidence that the Chinese government is indeed clamping down on easier credit. The Shanghai Composite lost 2.42 percent.

Sentiments turned more bullish during the morning US session as better than expected consumer confidence figures were reported. European markets closed mostly at a gain and US markets traded higher at noon before it reversed its gains.

Around 2pm, the Wall Street Journal reported the first estimates on the potential effect of the “Volker Plan” on banks. Analysts from Keefe Bruyette & Woods estimated that Goldman Sachs (NYSE:GS) may need to sell units related to principal trading worth $21.7 billion. For Morgan Stanley (NYSE:MS), the figure is $12.4 billion.

Goldman Sachs fell 2.56 percent; Morgan Stanley was down 1.66 percent, and the Dow Jones U.S. Financials Index declined 1.47 percent. Banks that do not rely as much on their trading units did not fare much better. Wells Fargo (NYSE:WFC) slipped down 2.42 percent and JPMorgan(NYSE:JPM) was down 1.96 percent. Regional banks BB&T (NYSE:BBT) ended 2.79 percent lower and Suntrust (NYSE:STI) lost 1.58 percent.

President Barack Obama announced today his proposal to reduce spending by $250 billion in the next 10 years and freeze non-security spending in the next three years.

This is the latest in a series of proposals by the Obama administration ahead of the Federal Reserve’s latest policy statement and State of Union address on Wednesday. In the recent past, Obama has proposed banking reforms, initiatives to help the middle class, and plans to punish government contractors who owe taxes.

The Conference Board’s consumer confidence index jumped to 55.9, more than what experts expected. Retailers such as Wal-Mart (NYSE:WMT), Macy’s (NYSE:M), and Target (NYSE:TGT) surged on this report and managed to hold on to some of the gains. All three stocks finished up more than 1 percent.

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