NEW YORK -- Wall Street wilted Tuesday as investors awaiting next week's Federal Reserve meeting remained uneasy that fallout from the slumping housing market could bring more bank losses and pull the economy into recession.
Retreating oil prices and signs of strength in industries outside the financial sector could not keep the stock market from declining for a second straight day. Investors have entered into December, usually a winning month on Wall Street, cautiously -- most expect to see lower rates when the Fed meets Tuesday, but the size of the cut, if any, is under debate.
Meanwhile, JPMorgan downgraded major securities firms, warning that while further write-offs of bad mortgage debt might help the firms' stocks, longer-term concerns about their risk management might hurt their overall valuation.
JPMorgan lowered its earnings estimates for some of Wall Street's biggest players: Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley.
Those investment banks and other financial companies fell, including Washington Mutual Inc., Citigroup Inc., Bank of America Corp., the government-sponsored Freddie Mac and Fannie Mae, and JPMorgan Chase & Co. itself. The sector has been dragging on the broader market since the summer.
"Earnings estimates for the fourth quarter are coming down, and a lot of that is because of the financial sector and the consumer discretionary sector, which includes the homebuilders," said Brian Gendreau, investment strategist for ING Investment Management.
He said a month ago, the consensus estimate for overall fourth-quarter earnings growth was about 10 percent; now, after warnings of subprime mortgage-related losses from the financial sector, the estimate is 2.1 percent.
"It's kind of an odd situation -- it's a dual economy," said Gendreau, pointing to robust expectations for technology and health-care.
The Dow Jones industrial average fell 65.84, or 0.49 percent, to 13,248.73.
Broader stock indicators also dropped. The Standard & Poor's 500 index fell 9.63, or 0.65 percent, to 1,462.79, and the Nasdaq composite index fell 17.30, or 0.66 percent, to 2,619.83.
Bond prices also fell, giving back some of their recent sharp gains, but they remain supported by rate cut expectations. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.90 percent from 3.85 percent late Monday.
Crude oil fell $1.10 to $88.21 per barrel on the New York Mercantile Exchange amid speculation that OPEC will raise production Wednesday and after a U.S. intelligence report concluded Iran halted its nuclear weapons development program in 2003.
As Wall Street tries to determine the Fed's move, it is anxious for Friday's employment report for November, particularly after last week's unexpectedly large uptick in jobless claims. The Labor Department report could indicate the direction of consumer spending, which is crucial to economic growth.
"There's a growing concern among investors that the economy is headed into recession," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "I don't believe the Fed action is going to give them a sparkling turnaround in the economy anytime soon. I don't think it even unfreezes the financial systems."
Moody's Investors Service downgraded a batch of asset-backed securities issued by Bear Stearns Cos., indicating that credit problems are persisting despite the Fed's last two rate cuts.
Most on Wall Street expect the Fed to further reduce the target federal funds rate, which stands now at 4.50 percent. Traders who bet on the Fed's next move were pricing in a 100 percent chance of a quarter-point cut, and a more than 60 percent chance of a half-point cut.
Still, financial stocks continued their slide, signaling that a Santa Claus rally may be tough to pull off given lingering worries about the risky debt banks hold. A report by D.A. Davidson & Co. analysts said bank stocks are at three- to four-year lows, and that after falling 25-30 percent this year, bank and thrift stocks are having their worst year since 1990.
Goldman fell $11.67, or 5.1 percent, to $215.22; Lehman fell $1.77, or 2.9 percent, to $59.61; Merrill fell $1.93, or 3.3 percent, to $57.13; Morgan Stanley fell $2.27, or 4.3 percent, to $50.01.
Although other sectors have been performing better, there was not much news Tuesday to lift Wall Street's mood.
Nokia Corp. fell $1.32, or 3.3 percent, to $38.92. The world's largest mobile phone maker disappointed investors with its operating margin targets. However, it predicted the global market for mobile devices will grow 10 percent in 2008 and that its share will increase.
Automakers also declined for the second day after General Motors posted weak November sales data and said it is slashing production. GM was the biggest loser among the 30 Dow companies after falling 93 cents, or 3.3 percent, to $27.68.
Declining issues outnumbered advancers by about 7 to 4 on the New York Stock Exchange. Consolidated volume came to 3.22 billion shares, down slightly from 3.23 billion shares Monday.
The Russell 2000 index of smaller companies fell 7.91, or 1.04 percent, to 752.06.
The dollar was mixed against other major currencies. Gold rose.
Overseas, Japan's Nikkei stock average dropped 0.95 percent, and Hong Kong's Hang Seng index rose 0.77 percent. Britain's FTSE 100 fell 1.12 percent, Germany's DAX index declined 0.36 percent, and France's CAC-40 fell 1.46 percent.
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