U.S. stocks fell on Friday as banks and brokers retreated on concerns about the impact of tightening credit on takeovers and the subprime mortgage industry.
Early gains evaporated as oil rose to $71 a barrel and investors booked profits before the quarter's end and the July 4th holiday week. That offset data pointing to moderating inflation and economic growth.
News of a probe into two Bear Stearns Cos hedge funds heavily invested in subprime mortgages increased worries that the potential fallout could spread throughout the banking industry. Bear Stearns shares fell 2.8 percent. Merrill Lynch & Co. also dropped 2.8 percent and ranked among the biggest drags on the Standard & Poor's 500 Index.
There was a significant intraday decline today. The market started out in pretty good shape -- the combination of inflation and economics was good this morning, said Phil Orlando, equity market strategist at Federated Investors in New York. And then you get word leaking on the SEC stepping up the Bear Stearns investigation, prompting the market to correct all of its gains.
The Dow Jones industrial average fell 13.66 points, or 0.10 percent, to end at 13,408.62. The Standard & Poor's 500 Index slipped 2.36 points, or 0.16 percent, to finish at 1,503.35. The Nasdaq Composite Index dropped 5.14 points, or 0.20 percent, to close at 2,603.23.
Despite a weak performance for the month of June, all three indexes gained for the quarter. The blue-chip Dow average gained 8.5 percent, the S&P 500 rose 5.8 percent and the Nasdaq climbed 7.5 percent.
For the week, the Dow rose 0.4 percent, the S&P 500 inched up 0.05 percent and the Nasdaq gained 0.6 percent.
Adding to negative sentiment on Friday was news that London police found two car bombs packed with petrol, gas and nails in the city's teeming theater district, averting attacks that echoed an earlier al Qaeda plot that could have killed hundreds.
Stocks rose earlier in the session, with the Dow up more than 100 points, after data reassured investors the economy was gaining strength, while an inflation measure moderated.
MORE PAIN FOR BANKS AND BUILDERS
In the financial sector, Merrill Lynch & Co. dropped 2.8 percent to close at $83.58 on the New York Stock Exchange. It was among the stocks contributing the most to the S&P 500's decline. An S&P financial index fell 0.7 percent. Shares of Citigroup slid 1 percent to $51.29, weighing on both the Dow and the S&P 500.
Bear Stearns' stock fell 2.8 percent to $140.
Financials have obviously been the group where the biggest concerns lie with respect to credit markets, subprime and obviously, corporate credit, with difficulty and tightening lending standards in financing some of the LBOs. said Peter Bookvar, equity strategist at Miller Tabak & Co. in New York.
The latest borrowers to feel the impact of loan investors shying away from riskier transactions were Bombardier Recreational Products, a privately held snowmobile and sports boat manufacturer which was forced to postpone a bank loan, and ServiceMaster, which delayed pricing of its $1.15 billion high-yield bond offering until Monday afternoon. Merrill Lynch was an underwriter for both deals.
Home builders' shares also slid, reflecting the widening concerns about troubles in the housing and mortgage sectors.
The Dow Jones U.S. Home Construction index fell 1.4 percent.
CORN-FED RALLY IN BIOFUELS STOCKS
Shares of biofuels company VeraSun Energy Corp. rose 5.4 percent to $14.48, after the U.S. Department of Agriculture released a huge corn plantings number, which was above analysts' estimates and the largest corn area in more than 60 years. The stock of Archer Daniels Midland Co., the largest U.S. ethanol producer, rose 2.3 percent to $33.09.
On Friday morning, a closely watched gauge of U.S. consumer inflation fell in May to its slowest annual pace in three years, while Midwest business activity kept expanding in June at a healthy clip and a survey of consumer sentiment showed a slight improvement in June.
Research In Motion Ltd. surged after the BlackBerry maker posted stronger-than-expected quarterly profit and announced a stock split. Apple Inc. gained as its hotly anticipated iPhone went on sale in U.S. stores.
Shares of Research in Motion shot up 20.8 percent to $199.99, landing near the top of the Nasdaq's list of biggest percentage gainers. Apple's stock gained 1.2 percent to close at $122.04 in Nasdaq trading.
Volume was moderate on the NYSE, where about 1.67 billion shares changed hands, below last year's estimated daily average of 1.84 billion.
On the Nasdaq, about 2.29 billion shares traded, above last year's daily average of 2.02 billion.
Advancing stocks outnumbered declining ones by a ratio of about 17 to 16 on the NYSE, while on the Nasdaq, decliners beat advancers by about 17 to 14.