Markets fall sharply as pessimism on the rise

NEW YORK - Investors are finding disappointment everywhere and taking out their frustration on stocks.

Stocks slumped Friday after banks' second-quarter earnings fell short of expectations and a new survey found that consumers were growing pessimistic. The Dow Jones industrial average lost 261 points, and all the major market indexes dropped more than 2.5 percent. Interest rates fell in the Treasury market as investors sought the safety of government securities.

The market fell at the opening after Citigroup Inc. and Bank of America Corp. released earnings. The two banks, like JPMorgan Chase & Co. a day earlier, reported higher earnings as losses from failed loans fell. But they are also seeing lower trading revenue because of the stock market's plunge this spring. The drop in revenue raised questions about how banks can make big profits if trading is curtailed by new federal regulations.

Stocks fell further after a twice-monthly survey from the University of Michigan and Reuters found that consumers were gloomier. An index of consumer sentiment compiled from the survey fell to 66.5 in early July from 76. That was a bigger drop than expected.

"It's mostly about the poor consumer-confidence numbers," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "The possibility of a double dip also starts to come to mind" for investors, he said, referring to the possibility that the economy could fall back into recession.

The unexpectedly low reading on consumer confidence "spooks people and reinforces fears that the economy is slowing too much, too fast," said Scott Marcouiller, chief technical-market strategist at Wells Fargo Advisors. He noted that stocks had just enjoyed a seven-day winning streak, which makes them vulnerable to a big drop. And light volume, typical for a summer Friday, exacerbated the losses.

"You get a few bad earnings numbers, and it's a lot of excuses to take profits if you got them," Marcouiller added.

Citigroup's shares were off 6.3 percent, while Bank of America was off 9.2 percent. General Electric Co. fell 4.6 percent, despite delivering stronger earnings and a healthy outlook. The company also reported a drop in revenue.

Stocks had struggled to a mixed finish Thursday after being down for much of the day on disappointing regional manufacturing reports for the Northeast. Much of the deficit was erased late in the day as news began to circulate that Goldman Sachs Group Inc. had settled civil fraud charges with the government over its dealings with subprime mortgage securities.

The Dow fell 261.41, or 2.5 percent, to 10,097.90. The Standard & Poor's 500 index fell 31.60, or 2.9 percent, to 1,064.88. The Nasdaq composite index fell 70.03, or 3.1 percent, to 2,179.05.

For the week, the Dow was down 1 percent, the S&P 500 down 1.2 percent, and the Nasdaq off 0.8 percent.

The formal announcement of Goldman's $550 million settlement with the federal government came after the stock market closed on Thursday. Goldman was the only major financial company to show a gain Friday. It was up 95 cents, or 0.7 percent, at $146.17.

Bank of America's stock fell $1.41, or 9.2 percent, to $13.98. Citigroup was off 26 cents, or 6.3 percent, at $3.90. Both companies beat analysts' expectations. However, the drop in their revenue as a result of the stock market's slide had investors worried about how banks would make money under new government regulations.

Google Inc. fell $34.41, or 7 percent, to $459.61 after its earnings fell short of analysts' expectations.

GE lost 70 cents or 4.6 percent to $14.55.

A government report on consumer prices for June was mainly in line with analysts' expectations. The Consumer Price Index dipped 0.1 percent last month.

The euro climbed above $1.29 as it recovers after a steep plunge this year amid fears that government debt in many European nations would send the continent back into recession.

Britain's FTSE 100 fell 1 percent, Germany's DAX index fell 1.8 percent, and France's CAC-40 fell 2.3 percent. Japan's Nikkei stock average tumbled 2.9 percent.