Despite an upbeat report on consumer spending, financial stocks descended further Friday in reaction to persistent concern about banking companies' credit quality and a weak economy.
The KBW Bank Index fell 1.5% after tumbling 3.7% Thursday. The index has dropped 20% this month.
"In most cases, banks' loan portfolios are still under serious duress, because the housing markets are still in decline," Joseph Battipaglia, the chief investment officer at Stifel Financial Corp.'s Ryan Beck & Co. Inc., said in an interview Friday. "And it's a problem that's deeper and lasting longer than earlier expectations, and that has the Street spooked."
The Standard & Poor's 500 lost 0.4% Friday, and the Dow Jones industrial average shed 0.9%, closing at its lowest level for the year.
Financial stocks and inflation worries fanned by oil prices that hovered above $140 a barrel dragged down the markets.
Popular Inc. fell 9%. Washington Mutual Inc. dropped 4.8%. Wachovia Corp. dropped 4.1%., and JPMorgan Chase & Co. dropped 3.5%.
The Commerce Department reported Friday that personal consumption rose 0.8% last month from a month earlier. The increase was the largest since November.
But economists said that one driver of that increase — the economic stimulus checks — will have only a short-term impact on economic growth. Another impetus — higher prices for fuel and food — is crimping pocketbooks and starting to force consumers to curtail spending on nonessential items, according to economists.
Eugenio J. Aleman, a senior economist at Wells Fargo & Co., said in an interview that those spending trends do not bode well for the economy in the second half and explain why the jump in personal consumption did little to curb the drop in stocks Friday.
"After the one-time effect" of the stimulus checks "wears off, the economy could be headed back to a weak performance," Mr. Aleman said.
Other notable decliners included United Community Financial Corp. of Youngstown, Ohio, which fell 16.2%; Northfield Bancorp Inc. of Avenel, N.J., which fell 9.3%; and Umpqua Holdings Corp. of Portland, Ore., which fell 7.1%.
Huntington Bancshares Inc. lost 0.2%, even though Fitch Inc. removed the stock Friday from its Rating Watch Negative list, citing the Columbus, Ohio, company's bolstered capital levels. Huntington raised more than $500 million from the sale of preferred securities in April.