Stocks sank in light trading Monday as worries about American International Group Inc. touched off broader concerns that the deterioration of the credit markets will bring more big losses for financial companies.
The major indexes lost about 2 percent. The Dow Jones Industrial Average fell by nearly 250 points, erasing a gain of about 200 points seen Friday. Bond prices also jumped as investors fled to the safety of government debt.
New York-based AIG was the steepest decliner among the 30 stocks that make up the Dow industrials after a Credit Suisse analyst cut his price target on the world’s largest insurer and forecast steep losses for the third quarter. Adding to investors’ concerns, Fitch Ratings warned late Friday that it might cut its ratings on the company, which has been buffeted by investors’ distaste for some of the types of complex debt instruments on AIG’s books.
Banks and other financial institutions have struggled in part because of a spike in the number of homeowners who have fallen behind on their mortgage payments. A report Monday by a trade group for real estate agents showed the number of unsold properties rose to an all-time high in July. Investors shrugged off a better-than-expected 3.1 percent increase in sales of existing homes that the National Association of Realtors’ report also showed.
The news arrived as volume remained light, with many traders on vacation for the last week of August. Sean Simko, head of fixed income management SEI Investments, said the stock and bond markets are showing big moves in part because of the thin stream of trades.
“There’s just too much uncertainty out there creating all this volatility. And what’s adding to the volatility is we’re entering this holiday period. The swings are exaggerated by the light volumes,” he said.
The Dow industrials fell 241.81, or 2.08 percent, to 11,386.25. The Dow surged nearly 200 points Friday as oil tumbled more than $6 a barrel - its biggest percentage drop in more than four years - and after Federal Reserve Chairman Ben S. Bernanke said inflation pressures are likely to moderate.
Broader stock indicators also fell Monday. The Standard & Poor’s 500 Index declined 25.36, or 1.96 percent, to 1,266.84, and the Nasdaq Composite Index fell 49.12, or 2.03 percent, to 2,365.59.
The Russell 2000 Index, which tracks smaller companies, fell 17.06, or 2.31 percent, to 720.54.
Bonds jumped Monday as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.79 percent from 3.87 percent late Friday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude rose 52 cents to settle at $115.11 per barrel on the New York Mercantile Exchange after Tropical Storm Gustav formed in the Caribbean.
Investors focused Monday on troubles in the financial sector. AIG fell $1.09, or 5.5 percent, to $18.78; the stock at times fell to levels not seen since the fall of 1995.