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Dow Drops 67 Points on a Momentum-Crushing Day; Why Goldman, JPMorgan Should Worry

By Dan Caplinger - Mar 11, 2014 at 9:00PM

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High-flying stocks suffered big reversals Tuesday as market sentiment got less frothy. Find out why financials were among the casualties today.

The Dow Jones Industrials ( ^DJI 0.10% ) adds to its losses from earlier in the week on Tuesday, falling 67 points despite having gained ground early in the morning hours of the trading day. Most investors pointed to continuing worries about Russia and China as well as domestic economic factors that could weigh on future growth and the sustainability of the five-year-old bull market. But when you look at some of the stocks in the market that took the biggest hits, you'll find that they had been generally riding waves of upward momentum in the recent past. Within the Dow, that spelled trouble for financials Goldman Sachs ( GS -0.70% ) and JPMorgan Chase ( JPM -1.14% ), given their ability to benefit when markets are frothy.

Powering down
The biggest reversal in the market today came from the fuel-cell industry, where Plug Power dropped by more than 40% after negative comments from Citron Research asserted that the fair value for the company's shares was more than 90% below its current share price. Plug and its peers had soared over the past several days, as hopes that the alternative-energy industry would achieve a more mainstream presence on the heels of a deal with Dow component Wal-Mart to supply fuel-cell equipment for its distribution centers. Yet the violence of the drop showed that investors weren't willing to give Plug or its peers any benefit of the doubt, selling quickly in response to any threat to their profits.

Closer to the financial industry, similar speculative fervor played out in shares of Fannie Mae ( FNMA 1.27% ) and Freddie Mac ( FMCC 2.56% ). The two government-sponsored mortgage enterprises had seen their shares climb sharply over the past few months, as large institutional investors made bets that the federal government would be willing to make some concessions to existing shareholders in assessing the next step following its current conservatorship status. Yet lawmakers today didn't seem to make any such concessions, and that sent Fannie and Freddie shares plunging 25% to 30%.

For Goldman and JPMorgan, today's losses of 2.1% and 1.7% weren't nearly as problematic as those for fuel-cell companies and the mortgage giants. But the troubles in those sectors do pose a big threat to one of their biggest potential growth opportunities, because they throw cold water in the face of investors who had previously been willing to take greater risk in order to reap the huge rewards that stocks have provided over the past five years. Any reminder that risk can actually result in big losses could make investors pull back from the market, and that in turn would bode ill for the business that Wall Street firms do in helping companies go public and raise capital from investors. With other potential headwinds, including the possibility of rising interest rates, bad news from the most aggressive end of the stock market is the last thing JPMorgan or Goldman need right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$35,754.75 (0.10%) $35.32
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$397.32 (-0.70%) $-2.79
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$160.71 (-1.14%) $-1.86
Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
FNMA
$0.95 (1.27%) $0.01
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
FMCC
$0.96 (2.56%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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