NEW YORK (Reuters) - The Dow and the S&P 500 fell to their lowest levels in three months on Monday after a broker downgrade of Citigroup sparked concerns more mortgage losses may lie ahead, compounding doubts about the outlook for the economy.
Goldman Sachs set the tone for the session when it recommended investors sell the shares of Citigroup saying the bank may have to write off $15 billion as mortgage losses reduce earnings.
The world's biggest reinsurer, Swiss Re, also fed worries that losses from the global credit crisis may widen, with its announcement of a $1.07 billion write-down.
"Everybody is expecting there will be more charges and write-offs," said Sam Rahman, portfolio manager at Baring Asset Management Inc in Boston.
"But the Goldman downgrade of Citigroup took the market by surprise," he said. "First, there is the magnitude of the write-offs they are predicting, plus it is unusual to see a 'sell' recommendation on such a large company."
The Dow Jones industrial average was down 218.35 points, or 1.66 percent, to end at 12,958.44. The Standard & Poor's 500 Index was down 25.47 points, or 1.75 percent, at 1,433.27. The Nasdaq Composite Index was down 43.86 points, or 1.66 percent, at 2,593.38.
Investors also had to contend with more disappointing news on the housing front. The Dow Jones U.S. Home Construction Index fell to its lowest level in 4 1/2 years, after an industry group said U.S. home builder sentiment stayed at a record low in November.
The National Association of Home Builders said potential buyers canceling orders or facing higher hurdles getting mortgages from lenders kept builders inundated with unsold houses.
In addition, Lowe's Cos. Inc, the No. 2 U.S. home improvement chain, slashed its full-year profit outlook, while Credit Suisse said Freddie Mac, the No. 2 U.S. home funding source, may suffer between $1 billion and $5 billion of losses on risky subprime mortgages.
Shares of Lowe's slid 7.6 percent to $23.12, leading the S&P retail index down 3 percent. Freddie Mac's shares fell 7.9 percent to $37.50. while rival Fannie Mae lost 7.6 percent to $37.58.
In the bond market, prices surged as investors bought Treasuries in a safe-haven move away from stocks. The benchmark 10-year note shot up 24/32, with the yield at 4.08 percent, down from 4.18 percent on Friday.
Citigroup shares fell 5.9 percent to $32 on the New York Stock Exchange, while shares of Bank of America Corp, the No. 2 U.S. bank, declined 3.5 percent to $42.82. The S&P financial index slid 3 percent.
The KBW mortgage finance index tumbled 3.9 percent, while the Dow Jones home builders index dropped 6.4 percent.
On the Nasdaq, shares of Apple Inc led the major decliners, down 1.5 percent at $163.95. Technology stocks have been hit by concerns that the credit crisis may hurt technology spending.
But even as a broad swath of the market sold off, shares of companies seen likely to withstand an economic slowdown headed higher.
Shares of Altria Group Inc, parent of cigarette maker Philip Morris, rose 0.9 percent to $73.84. During the session, Altria hit an all-time high of $74.35. McDonald's Corp, the world's largest fast-food chain, climbed 0.8 percent to $58.60.
Trading was thin on the NYSE in a week that will be shortened by Thursday's Thanksgiving holiday.
About 1.68 billion shares changed hands on the NYSE, falling short of last year's estimated daily average of 1.84 billion. But on Nasdaq, about 2.18 billion shares traded, ahead of last year's daily average of 2.02 billion.
Four stocks fell for every one that rose on the NYSE and the Nasdaq.
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