Stocks whacked by economy, Britain

Wall Street struggles with cloudy economic forecast. Standard & Poor's lowers its outlook for the United Kingdom.

By Ben Rooney, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Stocks fell sharply Thursday as enthusiasm about signs of economic improvement faded and investors were taken aback by a downgrade of the U.K. credit outlook.

The Dow Jones industrial average (INDU) and the S&P 500 (SPX) index were both down about 1.5% at midday. The Nasdaq composite (COMP) fell 1.8%.

Energy stocks slumped as oil prices fell more than 2% but remained at a 6-month high. Shares of financial services companies, which have lead the market in recent sessions, also tumbled.

"I think the market will be choppy for the next few months," said Ron Kiddoo, chief investment officer at Cozad Asset Management. He said Thursday's "malaise" could be a reflection of low volume, with many market participants absent ahead of the holiday weekend.

Stocks finished Wednesday's session lower after the Federal Reserve trimmed its 2009 economic growth targets and raised its forecast for unemployment. The central bank's dour outlook called into question the economic optimism that had lifted the market over the last few months.

"We're starting to see numbers that aren't quite as damaging," Kiddoo said. "But I don't think the market will trade to the upside until you start to see real growth."

British downgrade: Ratings agency Standard & Poor's lowered its outlook for the U.K. to "negative" from "stable."

S&P said its revision was based on the possibility that the country's debt burden could reach 100% of its gross domestic product, despite the U.K. government's "further fiscal tightening."

"The downgrade of Great Britain by S&P certainly damped enthusiasm," said Peter Cardillo, chief market economist at Avalon Partners.

Economy: The Labor Department reported that initial jobless claims declined by 12,000 in the week ending May 16.

The number of people filing for first-time jobless benefits totaled 631,000 last week, slightly more than expected. But those filing claims on an ongoing basis rose to 6.6 million, an all-time high.

Separately, the Conference Board's reading of leading economic indicators, which predicts economic conditions six to nine months in the future, rose 1% in April -- slightly better than the 0.8% analysts' expected.

The Federal Reserve Bank of Philadelphia said its index of manufacturing activity in the mid-Atlantic region improved to negative 22.6 in May from negative 24.4 in April. Economists surveyed by Briefing.com had expected the index to improve to negative 18.

World markets: Investors around the world were in a downbeat mood. In Asia, most shares finished lower. European stocks tumbled in morning trading, following S&P's downgrade of the U.K. outlook.

Companies: Auto finance firm GMAC is poised to receive a second bailout from the Treasury, according to the Detroit News. The newspaper said the company is due to receive $7.5 billion more in aid.

In one of the first Nasdaq initial public offerings of the year, OpenTable, which operates a restaurant reservation system, raised $60 million, one of the deal's underwriters told Reuters. The company priced its shares at $20 each, which was higher than expected, and nearly 40% to $27.90 in late morning trading.

Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.26% from 3.19% Wednesday. Treasury prices and yields move in opposite directions.

Other markets: Oil slipped from its Wednesday high, but still continued to trade above $60 a barrel. The price of oil dropped $1.46 a barrel to $60.58

In currency trading, the dollar rose versus major international currencies, including the euro, the yen and the British pound.

COMEX gold for June delivery rose $7.60 to $945 an ounce.

First Published: May 21, 2009: 9:43 AM ET

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