U.S. Stocks Fall After GDP Trails Forecast, Jobless Claims Rise

U.S. stocks dropped for a second day after the economy grew less than forecast, jobless claims jumped and Federal Reserve Chairman Ben S. Bernanke said some smaller banks will probably collapse.

JPMorgan Chase & Co. led financial shares to their first drop in five days after Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their profit estimates. The Standard & Poor's 500 Financials Index extended its decline after Bernanke said that in many cases small banks need to raise more capital. Sprint Nextel Corp., the third-biggest U.S. wireless carrier, retreated to a five-year low after reporting a record $29.5 billion loss.

The S&P 500 declined 12.97 points, or 0.9 percent, to 1,367.05 at 11:20 a.m. in New York. The Dow Jones Industrial Average decreased 126.34, or 1 percent, to 12,567.94. The Nasdaq Composite Index lost 19.68, or 0.8 percent, to 2,334.1. About seven stocks fell for every two that rose on the New York Stock Exchange.

We're still seeing the fallout from housing, and the credit crunch is still unfolding, said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities. It seems like every credit rock you turn over has something crawl out from underneath it. That makes us relatively defensive.

The U.S. economy in the fourth quarter grew at an annual rate of 0.6 percent, less than forecast and reflecting reduced estimates for spending and construction. Initial jobless claims increased by 19,000 to 373,000 in the week ended Feb. 23, the Labor Department said. Total benefit rolls rose for a second straight week to the highest since October 2005.

Profit Slump

The S&P 500 has dropped 6.9 percent this year on concern the collapse of subprime mortgages and a slowdown in the world's largest economy will drag down profits. Profit slumped 16 percent on average at the 440 members of the S&P 500 that reported fourth-quarter results so far, according to Bloomberg data. During the first quarter, earnings will decline 1.6 percent, according to the average analyst estimate.

Markets tend to bottom out fairly slowly, Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, which manages $30 billion, said in a Bloomberg Television interview. We don't want to be too quick to commit money only to see markets roll over with a wave of bad news. We're much more optimistic about the economy later this year.

Sprint Nextel fell 72 cents to $8.23 on the NYSE. The company's per-share loss was $10.36 as customers defected and it wrote down the value of the purchase of Nextel Communications Inc. Sprint also eliminated its dividend.

Goldman, Merrill

JPMorgan lost $1.45 to $42.96. Goldman Sachs and Merrill Lynch reduce their forecasts on expectations of writedowns in the value of its home-equity loans.

Financial shares lost 2.6 percent, the most among 10 industries in the S&P 500. Bernanke, testifying before Congress about the state of the economy, said there probably will be some bank failures. Large banks will likely be spared because they have enough cash to stay solvent, he added.

American International Group Inc. fell on speculation the insurer may report its first quarterly loss in five years. AIG, the world's biggest insurer, fell $1.32 to $50.93. Chief Executive Officer Martin Sullivan, who has failed to win the confidence of shareholders since he succeeded Maurice Hank Greenberg in 2005, may report a fourth-quarter loss of $1.20 a share, according to Goldman Sachs analyst Tom Cholnoky.

`Disproportionately Shared'

The problem in the banking industry is disproportionately shared by the largest names, said Matthew DiFilippo, director of research at Stewart Capital Advisors, which manages $1 billion in Indiana, Pennsylvania.

Most U.S. stocks retreated yesterday as a slump in utilities and drugmakers offset speculation Federal Reserve Chairman Ben S. Bernanke will cut interest rates to avert a recession.

Mylan Inc. sank $1.09 to $12.06. The company said it had a quarterly loss of $1.38 billion on expenses from its $6.9 billion purchase of Merck KGaA's generics unit.

Thornburg Mortgage Inc. tumbled $1.93, or 17 percent, to $9.61. The mortgage lender that specializes in adjustable-rate loans said it may have to sell assets to meet lenders' demands for increased collateral as prices of mortgage-backed bonds extended declines this month.

Thornburg has already met $300 million of margin calls, depleting its available cash and reducing its ability to meet future demands for more collateral, it said in a filing with the Securities and Exchange Commission today.

The gain in gross domestic product from October through December matched the government's advance estimate issued last month and followed a 4.9 percent third-quarter pace, according to revised figures issued today by the Commerce Department in Washington. The median estimate in a Bloomberg News survey of economists projected a 0.8 percent increase.