The dawn of the Obama presidency could not shake the stock market from its dejection over the rapidly deteriorating state of the banking industry.
Financial stocks, many of them falling by double digit percentages, led a huge drop on Wall Street Tuesday that left the major indexes down more than 4% and the Dow Jones industrials down 332 points.
Although traders on the floor of the New York Stock Exchange paused to watch the inauguration ceremony and Obama's remarks, the transition of power didn't erase investors' intensifying concerns about struggling banks and their impact on the overall economy.
The market's angst, which began with multibillion losses reported last week by Bank of America Corp. and Citigroup Inc., intensified after the Royal Bank of Scotland's forecast that its losses for 2008 could top $41.3 billion.
The collapse in bank stocks was swift Tuesday: State Street plunged 59%, Citigroup fell 20% and Bank of America lost 29%. Royal Bank of Scotland fell 69% in New York trading.
The shrinking value of bank stocks means the financial industry accounts for less than 10% of the Standard & Poor's 500 index for the first time since 1992. At the end of 2006, banks made up 22% of the stock market benchmark.
And the market's retreat Tuesday means Wall Street has eaten through most of the advance it made from Nov. 20 through Jan. 6. The S&P 500, which had been up as much as 24%, is now up only 7% from its November low.
Fears about banking eclipsed the shift in Washington. Royal Bank of Scotland's forecast for what would be the biggest loss ever for a British corporation left investors fearful that government's would have to nationalize banks to keep them from collapsing. The British government injected more money into the struggling bank Monday and announced another round of bailouts for the country's banks.
State Street and Regions Financial, a bank with branches primarily in the Southeast, both reported big earnings drops Tuesday.
Acknowledging the global economy's woes, Obama suggested Wall Street would see greater oversight: "Without a watchful eye, the market can spin out of control," he said in his address outside the Capitol.
Obama warned the economic recovery would be difficult and that the nation must choose "hope over fear, unity of purpose over conflict and discord" to overcome the worst economic crisis since the Great Depression.
Investors are expecting Washington will be a central part of the economic recovery. But the first hours of the new administration did little to ease their concerns.
"At this stage, markets in general and bank investors specifically are really looking to government as the way out," said Jack Ablin, chief investment officer at Harris Private Bank. "Certainly, of just about all of inaugurations that I can recall today's event probably has the not only the symbolic importance but really tangible importance to the stock market."
The Dow Jones industrial average fell 332.13, or 4.01%, to 7,949.09, its lowest close since Nov. 20, when the blue chips ended at 7,552.29 — their lowest point in more than five years. It was also the blue chips' biggest drop since Dec. 1.
During much of Obama's address, the average was down about 150 points. Traders hadn't appeared so focused on TV screens since Sept. 29, when the House initially voted against the banking bailout package and the Dow tumbled 777 points.
The Dow's showing was its worst ever for an Inauguration Day.
Broader stock indicators also fell sharply Tuesday. The Standard & Poor's 500 index fell 44.90, or 5.28%, to 805.22, and the Nasdaq composite index fell 88.47, or 5.78%, to 1,440.86.
The Russell 2000 index of smaller companies fell 32.80, or 7.03%, to 433.65.
Losing issues outnumbered gainers by about 9 to 1 on the New York Stock Exchange, where consolidated volume came to 6.23 billion shares compared with 5.92 billion shares traded Friday. The stock market was closed Monday for Martin Luther King Jr. Day.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.37% from 2.34% late Friday. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.10% from 0.11% late Friday.
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the market's decline was interrupted by Obama's inauguration speech but that the markets then continued to trade on the problems in the financial sector.
"There's just tremendous fear and uncertainty in the banking sector," Cripps said. "Even those closest to the issue, like executives and analysts, there's a feeling of tremendous uncertainty. They're not giving any positive guidance because they just don't know. Lacking that (certainty) we're left to our worst fears, and that's what you're looking at with bank stocks."
Citigroup fell 70 cents, or 20%, to $2.80, a 17-year low. After the market's close, the company cut its quarterly dividend to a penny to meet one of the stipulations set by the government's $20 billion bailout of the company.
Bank of America fell $2.08, or 29%, to $5.10. Morgan Stanley fell $2.49, or 16%, to $13.10.
State Street, which had been performing better than most financial services companies, reported a 71% drop in fourth-quarter profit as it was forced to billions of dollars in write-downs on its commercial paper program and investment portfolio. The bank also said it expects 2009 operating earnings to be flat with 2008, below the company's long-term goal of 10% to 15% growth. State Street plunged $21.46, or 59%, to $14.89.
And Regions Financial reported a fourth-quarter loss of $6.24 billion, weighed down by a hefty charge to reflect declining value in its banking reporting unit. Its stock plunged to a 24-year low, closing down $1.47, or 24%, at $4.60.
Overseas, Japan's Nikkei stock average fell 2.3%. Britain's FTSE 100 fell 0.42%, Germany's DAX index fell 1.77%, and France's CAC-40 fell 2.15%.