Bank worries drag Dow down by 185 points

The break in the stock market’s recent rally was widely expected.

NEW YORK (AP) — A stock market ripe for a big pullback succumbed Tuesday, plunging when rumors of a bank failure revived investors’ anxiety about the banking industry and the economy as a whole.

A batch of economic reports that just weren’t good enough added to the mix as the major indexes all fell about 2 percent and the Dow Jones industrials slid 185 points. Treasury prices, usually the beneficiary of a slide in stocks, ended only moderately higher.

A break in the market’s rally was widely expected because pressure to sell has been building for some time. While the major indexes finished August with respectable gains, including a 3.4 percent rise in the Standard & Poor’s 500, trading was erratic and there was little conviction behind the advances. Analysts warned that investors were doubting whether they should have bid stocks so high in the rally that began six months ago.

So it wasn’t surprising that, after the Dow was up 60 points in response to a seemingly better-than-expected reading on manufacturing, something like a rumor about a possible bank failure could take the market down.

“Some time midmorning, rumors came out that a large bank could be in trouble,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “That’s all it takes to spook this market.”

The Dow’s drop virtually equaled a 186-point slide two weeks ago that the market later recovered from, sending stocks to their highest levels in almost 10 months. Dan Deming, a trader with Strutland Equities in Chicago, said it didn’t appear much had changed in the market since then, but investors have grown more nervous as stocks have pushed higher and that was enough to tip off heavy selling.

“It’s really more psychological right now than anything. The first day of September — the market shows some weakness and then it just kind of starts to feed on itself,” he said. “Everybody is kind of looking over their shoulder.”

Deming referred to the fact that many investors had some fear of what might happen in September, which historically has been the worst month for stocks. Many analysts said the change in calendar was one of many factors that created a critical mass of sorts for the market and fueled Tuesday’s drop.

Banks and insurance companies were among the most notable losers amid the fears of bank failures, but they also had been pumped up the most in the rally that lifted the market more than 50 percent since hitting 12-year lows in March. With the government reporting last week that 400 banks were in trouble during the second quarter, investors’ anxiety about the health of the financial industry was heightened and so rumors that investors might shrug off in less fractious times became powerful enough to cause sustained losses.