Stocks turned lower Monday as investors reacted to cautious remarks about the economy by a Federal Reserve official and worried about the financial health of Fannie Mae and Freddie Mac. Treasurys rose sharply as investors sought the safety of government debt.
With Wall Street nervous about those two government-sponsored lenders and other struggling banks ahead of their earnings later this month, the Dow Jones industrial average dropped by more than 130 points.
San Francisco Federal Reserve President Janet Yellen said in a speech that problems in the housing market and banking system could get even worse before the economy recovers, according to media reports. The comments added to concerns raised in a note by Lehman Brothers analysts about Fannie and Freddie possibly needing to raise more capital as the aftermath of the credit crisis continues.
Worries about the ailing financial sector erased a stock rally that had been fueled by a pullback in oil prices. Oil fell at times fell by more than $5 a barrel as the dollar gained strength and as some market worries over the political tension in the Middle East appeared to dissipate.
Wall Street, which has been hurtling stocks lower for the past few weeks, remains fearful that consumers faced with soaring energy prices are trimming spending in other areas. With consumer spending accounting for more than two-thirds of U.S. economic activity, a pullback could create sizable ripples.
Trading volumes were relatively low on Monday, as they were on Thursday ahead of the July 4th holiday, as investors took to the sidelines and fled to the safety of Treasurys, sending prices higher. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dropped to 3.90 percent from 3.98 percent late Thursday.
"The weakness in the market is not the fact that there's a lot of sellers _ it's that there's a lack of buyers," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
He added that some negative technical indicators on Thursday presaged the market's weakness Monday _ notably, that there were no companies that set 52-week highs on the New York Stock Exchange on Thursday, Fullman said. "It's unusual to see a drop-off like that."
In midafternoon trading, the Dow fell 134.91, or 1.20 percent, to 11,153.63, after rising by more than 100 points earlier in the session. In addition to financials, the drug maker Merck acted as a significant drag on the blue-chip index, falling $2.05, or 5.3 percent, to $36.40.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 19.28, or 1.53 percent, to 1,243.62, and the Nasdaq composite index fell 23.98, or 1.07 percent, to 2,221.40.
Fannie Mae fell $3.19, or 17 percent, to $15.59 and Freddie Mac fell $2.51, or 17.3 percent, to $11.99, after Lehman Brothers analysts said that new accounting rules could require Fannie to raise $46 billion more capital and Freddie to raise $29 billion.
Dow components American Express Co., Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. also saw their shares fall ahead of their earnings reports later this month.
Citigroup fell 86 cents, or 5.1 percent, to $15.96; JPMorgan dropped $1.60, or 4.5 percent, to $33.71; Bank of America Corp. fell $1.19, or 5.3 percent to $21.21; and American Express fell $1.30, or 3.2 percent, to $38.94.
Aluminum producer Alcoa Inc. is set to start the earnings season when it reports results Tuesday.
Investors haven't been optimistic lately about the prospects for an economic recovery in the second half of 2008 as they once had. The Dow has fallen the last three weeks while the Standard & Poor's 500 index and the Nasdaq composite index have logged five straight weeks of declines. With drops of more than 20 percent from their October highs, the Dow and the S&P 500 entered bear market territory last week as rising oil stirred inflation concerns.
The dollar traded mixed against other major currencies, while gold prices fell.
In corporate news, NBC Universal and two partners said Sunday they struck a deal to acquire The Weather Channel from Landmark Communications Inc. NBC is a unit of General Electric Co., which is scheduled to report its quarterly results Friday. GE rose 11 cents to $27.02.
General Motors Corp. is considering cutting more white-collar jobs and getting rid of some brands, according to a person familiar the company's discussions. The person asked not to be identified because no decisions have been made. GM shares, which recently sank to all-time lows, fell 4 cents to $10.08.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 891.2 million shares.
The Russell 2000 index of smaller companies fell 11.04, or 1.66 percent, to 654.74.
Light, sweet crude fell $1.98 to $143.31 a barrel on the New York Mercantile Exchange.
Overseas, Japan's Nikkei stock average rose 0.92 percent. Britain's FTSE 100 rose 1.85 percent, Germany's DAX index rose 1.97 percent and France's CAC-40 advanced 1.80 percent.
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