U.S. Stocks Drop on Bank Downgrades; Asia, Europe Shares Gain

U.S. stocks declined, paring the biggest weekly gain in five years, after analysts advised selling Wells Fargo & Co. and Wachovia Corp. on concern a recession will increase personal defaults and reduce consumer spending.

Wells Fargo and Wachovia, the fourth- and fifth-largest U.S. banks, dropped the most in two weeks as Merrill Lynch & Co. told investors they are overpriced. American Express Co., the third- biggest credit-card network, slumped after UBS AG said higher U.S. unemployment will reduce its profits. Concern spending will slow also dragged down retailers such as Tiffany & Co., the No. 2 luxury jewelry seller.

The Standard & Poor's 500 Index fell 7.3, or 0.5 percent, to 1,388.12 as of 11:21 a.m. in New York after rallying 4.9 percent last week. The Dow Jones Industrial Average, the best-performing benchmark among indexes in the 20 biggest markets last month, decreased 43.57, or 0.3 percent, to 12,699.62. The Nasdaq Composite Index retreated 12.08, or 0.5 percent, to 2,401.28. About two stocks declined for every one that advanced on the New York Stock Exchange.

If economic growth is slowing, there may not be that much demand for borrowed money, said John Carey, who oversees about $13 billion at Pioneer Investment Management in Boston. The financial stocks make up a significant part of the market and facilitate a lot of other business transactions.

The losses came as stocks in Europe and Asia advanced, helped by takeover speculation. The Dow Jones Stoxx 600 Index of European shares rose 0.1 percent after U.K. pub owner Mitchells & Butlers Plc received a merger proposal and Fortescue Metals Group Ltd. said it held talks with strategic investors.

Higher Unemployment

Wells Fargo fell $1.74 to $31.91 and Wachovia dropped $2.31 to $36.45. Merrill Lynch lowered its recommendations on the stocks to sell from neutral, citing the latest Case- Shiller data which showed rapidly declining California real- estate values. They said the valuations of the companies did not fully discount earnings and recession risk in 2008.

Citigroup Inc. dropped 32 cents to $29.37, Bank of America Corp. slipped 45 cents to $44.58 and JPMorgan Chase & Co. declined 90 cents to $47.36.

American Express decreased $1.68 to $47.92. UBS analysts led by New York-based Eric E. Wasserstrom advised selling the shares because the recession will result in higher levels of unemployment in 2008-09, the primary driver of credit losses.

American Express is tied to small businesses and consumers in terms of spending, said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. That's an ongoing issue. This market is going to be choppy.

Credit Cards

Shares of other credit card companies decreased. Discover Financial Services slid $1.20 to $16.76. Capital One Financial Corp. dropped $4.24 to $52.73.

Humana Inc. lost $2.38 to $79.46. The No. 2 provider of U.S.-funded health benefits fell the most since August on investor concern the next president may cut insurance subsidies, according to Christine Arnold, an analyst with Morgan Stanley in New York. The speculation overshadowed a 57 percent rise in quarterly earnings.

KB Home plunged $2.35, or 8.2 percent, to $26.40. Chief Financial Officer Domenico Cecere sold 80,000 shares of the fifth-largest U.S. homebuilder, according to a filing with the U.S. Securities and Exchange Commission.

Dynegy Inc. gained 50 cents to $7.63, leading utilities shares higher. The owner of power plants in 13 U.S. states advanced after Barron's said the company's shares may double on increased cash flow and asset values.

Best Week

The decline in the S&P 500 followed the index's best weekly gain since 2003. The Federal Reserve's second interest-rate cut in two weeks, Microsoft Corp.'s $44.6 billion bid for Yahoo! Inc. and a plan to rescue bond insurers lifted equities.

The S&P 500 climbed 4.9 percent last week, trimming its yearly loss to 5 percent. The Dow average has fallen 3.9 percent and the Nasdaq dropped 9 percent in 2008.

Job cuts announced by U.S. employers jumped 19 percent in January from a year earlier as businesses attempted to rein in costs, according to a report by a private placement firm.

Announcements increased to 74,986 last month from 62,975 in January 2007, Chicago-based Challenger, Gray & Christmas Inc. said. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of monthly figures.

Companies may trim their workforce further as the worst housing slump in a quarter century threatens to push the economy into a recession, economists said. The report followed government figures last week that showed the U.S. lost jobs in January for the first time in more than four years.

Stocks also fell after orders to U.S. factories rose less than economists forecast. The orders increased 2.3 percent, the Commerce Department said, less than the 2.5 percent median forecast in a Bloomberg News survey.