Stock Market USA Today: June 2008

As investors dealt with negative news within the financial sector, stocks ended Friday's session with significant losses. The downward move more than offset the modest gains posted in the previous session.

Investors sold stocks throughout the session due to concerns about the consequences of the credit crunch. Analysts at Merrill Lynch reportedly slashed their earnings outlooks on several large regional banks, stating that they will have to cut dividends and continue to boost loss reserves.

Additionally, Moody's Investor Services cut its ratings on Ambac Financial Group (ABK | Quote | | , citing their impaired ability to raise capital and write new business. The ratings cuts came as no surprise, as Moody's said earlier in the month that it would likely cut their ratings.

The markets were pressured further after Standard & Poor's said it might downgrade the credit ratings on General Motors (GM | Quote | News | PowerRating), Chrysler and Ford (F | . S&P stated that the companies' sales might continue to deteriorate through 2009 due to weakening U.S. industry conditions. The credit rating agency put the automaker's ratings on credit watch with negative implications.

While investors grappled with the credit crisis, they also had to deal with soaring energy prices. Oil closed higher, reclaiming some of its sharp loss from Thursday's session. Light sweet crude ended the day at $134.62 a barrel, up $2.69 on the session. Crude oil dropped $4.75 a barrel on Thursday after China said it would boost prices of retail gasoline and diesel prices, leading to speculation that demand could diminish.

However, a Goldman Sachs analyst said the price hike will not reduce demand and may even increase it. Prices also got a boost amid speculation of labor problems at a Chevron plant in Nigeria, Africa's largest oil producer. On Thursday, an oil field off the coast in Nigeria was shut down because of a militant attack. Investors are also awaiting the results of a meeting of OPEC members in Saudi Arabia this weekend, with a rise in production expected from the host country.

The major averages ended the session with substantial losses, with the Dow closing below the physiological 12,000 mark for the first time since mid-March. The Dow closed own 220.40 points or 1.8 percent at 11,842.69, the Nasdaq closed down 55.97 points or 2.3 percent at 2,406.09 and the S&P 500 closed down 24.90 points or 1.9 percent at 1,317.93.

With the losses on Friday, the major averages all showed notable declines for the week. The Dow showed a 3.8 percent weekly decline, while the Nasdaq and the S&P 500 posted weekly losses of 2 percent and 3.1 percent, respectively.

Sector News

Airline stocks turned in some of the worst performances on Friday, as the price of oil saw a sharp increase. The Amex Airline Index ended the session down 7.2 percent, reversing most of the gain posted in the previous session. On Thursday, the index set a two-week closing high.

Housing stocks also saw significant selling pressure, with the Philadelphia Housing Index showing a 3.4 percent decline. Within the sector, Radian Group (RDN | Quote | Chart | News | PowerRating) was one of the biggest losers after a UBS analyst cuts its price target to $3 from $7, citing uncertainty surrounding the insurer's outlook. Radian ended the day 9.2 percent lower to set a record closing low.

Additionally, SanDisk (SNDK | Quote | Chart | News | PowerRating) led the disk drive sector sharply lower after being downgraded. The Amex Disk Drive Index fell 2.8 percent, reversing a modest gain posted in the previous session. With the decline, the index set a monthly closing low.

After being downgraded by a Citi Investment Research analyst, shares of SanDisk ended the day 9.7 percent lower, setting a nearly three-month closing low. The analyst downgraded the stock to a Hold rating and cut his target price to $27 from $35, stating that industry-wide trends will likely harm the company's performance.

Other stocks that showed considerable weakness include retail, brokerage and semiconductor stocks. The S&P Retail Index closed down 3.3 percent, compared to a 2.9 percent decline by the Amex Securities Broker/Dealer Index. The Philadelphia Semiconductor Index fell 2.8 percent.

On the other hand, gold stocks saw notable gains despite a modest decrease in the price of the precious metal. The Amex Gold Bugs Index closed up 1.5 percent, setting a two-week closing high.

Dow Components

The Dow components ended Friday's session with sharp declines, sending the blue chip index well below the psychological 12,000 mark. Of the 30 stocks that make up the Dow, only Coca Cola (KO | Quote | Chart | News | PowerRating) ended the day higher.

General Motors was the clear loser within the Dow after S&P put the automaker's credit rating on credit watch with negative implications. Shares of General Motors closed down 6.8 percent, adding to losses posted in the three previous sessions. The stock has been trending lower for the past six weeks, and today's decline dropped it to another 25-year closing low.

Alcoa (AA | Quote | Chart | News | PowerRating) also saw significant selling pressure, falling 4.6 percent. With the decline, the stock closed at its worst level since early May. Earlier in the day, the aluminum producer said it would temporarily halt half of the production at its Rockdale, Texas smelter due to power supply interruptions.

Hurt by the turmoil within the financial sector, Citigroup (C) posted a substantial loss as well. The stock fell 4.3 percent, adding to a loss posted in the previous session. American Express (AXP | Quote | Chart | News | PowerRating) and Bank of America (BAC | Quote | Chart | News | PowerRating) also saw weakness from the financial sector. American Express closed down 3.4 percent, while Bank of America saw a decline of 3.7 percent to set a five-year closing low.

On the other hand, Coca Cola was the sole gainer within the Dow. Shares of the beverage maker closed up 0.6 percent after seeing declines in the previous six sessions. On Thursday, the stock set a six-month closing low.

Other Markets

In overseas trading, the major Asian markets were mostly lower for the second straight day on Friday, although the Malaysian, Singaporean and Chinese markets bucked the downtrend. Japan's Nikkei 225 index showed a notable downward move, closing down 1.3 percent.

European stocks also saw significant selling pressure, adding to the losses that were seen in the previous session. The French CAC 40 index and the German DAX index closed down 1.8 percent and 2.1 percent, respectively, while the U.K.'s FTSE 100 index posted a 1.5 percent loss.

Meanwhile, treasuries ended the session with moderate gains. The benchmark ten-year note saw significant buying interest at the start of the day, but it pared some of its gain in mid-day trading. While the note moved back to the upside in the final two hours of the session, it still closed off of its best level of the day. Subsequently, the yield on the ten-year note closed down 6.2 basis points at 4.137 percent.

Looking Ahead

Looking ahead to next week, all eyes will be on the Federal Reserve's meeting that concludes on Wednesday. With accelerating rates of inflation combined with a weak economy, the Fed will have to walk a fine line when it comes to interest rates. Most analysts expect the Fed to keep interest rates unchanged.

While the Federal Reserve's announcement will be the main focus next week, there are several economic reports that are scheduled to be released, including durable goods data, personal income and spending data and the final reading on first quarter GDP.

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