All the optimism surrounding the run to record market highs has worn off today as stocks dive and the Dow Jones Industrial Average (DJINDICES:^DJI) plunges into the red. As of 2:20 p.m. EDT, the index has fallen 77 points, or 0.53%, with just six of its 30 components recording small gains. Unsurprisingly, Europe's back in Wall Street's focus and is prompting investors to pull back after the recent gains. Let's check out why.
Cyprus battles the ECB
The European Central Bank isn't pleased with Cyprus after the island nation rejected the bailout deal that would have imposed a levy on bank depositors in order to shore up its financial sector. The ECB has now threatened to suspend aid to Cyprus' banks unless the country finalizes a bailout deal by Monday, although the country also continues to seek aid from Russia as well. Combined with a disappointing manufacturing report out of Europe's economic safe house, Germany, this news has only hurt investor confidence that anything resembling stability will emerge in Europe anytime soon.
It has also put a dent in the financial sector. The Dow's two big banks, Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM), have fallen 1.2% and 1.2%, respectively. While Cyprus' economic crisis won't impact these and other major banks too badly considering the country's minuscule share of the EU economy, any spreading of the panic to larger nations in the eurozone would be bad news.
It's especially bad timing for JPMorgan after the Office of the Comptroller of the Currency downgraded the company's management rating in the ongoing fallout of the "London Whale" trading fiasco. The OCC, which slashed JPMorgan's rating to a three on its five-point scale, now ranks the company in a position where leadership is considered to "need improvement." That's a sharp change for the bank that emerged from the recession stronger than some of its financial rivals, though fellow Fool analyst John Grgurich notes that now may be the best time to buy JP Morgan and its standout fundamentals.
Tech's also on the downswing today, with shares of Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM) leading the Dow lower with respective losses of 3.8% and 1.7%. Cisco has taken the biggest hit after it was downgraded by FBR & Co. from "market perform" to "underperform." An FBR analyst cited Cisco's increasing challenges in evolving into a service-oriented business as demand for routing and switching lags. Still, Cisco's a cheap tech giant at a P/E of less than 12, and it appeals to income investors with its 2.6% dividend yield at a modest 25% payout ratio. It's not the time to sell this strong stock just yet, even if shares have climbed more than 14% in the past six months.