AIG and Wal-Mart spark sell-off on Wall Street

By Kristina Cooke Thu Aug 7, 4:27 PM ET

NEW YORK (Reuters) - U.S. stocks tumbled on Thursday after a big loss from insurer American International Group fueled fears of more fallout from the credit crisis and Wal-Mart's (WMT.N) cautious sales forecast added to concerns about consumer spending.

The mood in the financial sector was rattled after AIG (AIG.N), the world's largest insurer, posted its third consecutive quarterly loss of more than $5 billion as it wrote down bad mortgage-related investments. AIG's shares had their worst day in more than two decades.

Citigroup (C.N) added to the sector's unease after the bank agreed to buy back more than $7 billion of illiquid auction-rate securities to settle charges it misled investors about the debt's risk. American Express' (AXP.N) shares fell after Moody's Investors Service said it may downgrade the credit card company's debt rating.

Concerns about the consumer were pushed into the spotlight after Wal-Mart Stores reported disappointing July sales results as shoppers ran out of extra tax rebate cash, damping hopes for the current back-to-school shopping season.

A U.S. government report that showed the number of people filing for first-time jobless benefits jumped to the highest level in more than six years in the latest week added to concerns about the outlook for consumer spending, as did a rise in the price of oil.

"Today we're facing a host of news reports which do not bode well for stocks prices. AIG is still in the eye of the storm and then you have Wal-Mart and jobless claims, which added to the lack of enthusiasm for stocks," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

The Dow Jones industrial average (.DJI) slid 224.64 points, or 1.93 percent, to close at 11,431.43, led lower by Wal-Mart and AIG.

The Standard & Poor's 500 Index (.SPX) fell 23.11 points, or 1.79 percent, to 1,266.08, while the Nasdaq Composite Index (.IXIC) dropped 22.64 points, or 0.95 percent, to 2,355.73.

The declines followed two days of gains on Wall Street.

In addition to posting a quarterly net loss, AIG reported a general deterioration in its mainstream insurance business. Analysts said the news suggested that fallout from the credit crisis, spawned by the U.S. housing slump, was far from over. AIG's shares fell 18.1 percent to $23.84.

Citigroup's shares fell 6.2 percent to $18.47. News of the Citigroup settlement over the auction-rate debt "puts pressure on other players like UBS, HSBC, Merrill Lynch, to do the same thing," said Brian Yelvington, analyst with CreditSights in New York.

American Express shares fell 4.2 percent to $36.40 after Moody's said it may cut the company's A1 credit rating, given concerns about asset quality and lending exposures. The S&P financials sub-index (.GSPF) fell 4.9 percent.

An index of retail stocks (.RLX), meanwhile, dropped 2.1 percent. According to Retail Metrics, 54 percent of retailers reported July sales that missed expectations, with discount retailers showing the best relative performance of the group. Department stores fared the worst.

Wal-Mart shares fell 6.3 percent to $56.96 and Target Corp (TGT.N) fell 4.7 percent to $45.76. Abercrombie and Fitch (ANF.N) shares fell 10.6 percent to $49.80.

U.S. crude oil prices ended up $1.44 at $120.02 a barrel, stemming three days of losses, as a pipeline shutdown in Turkey due to an explosion raised supply worries.

The rise in the oil price dragged down shares of companies particularly sensitive to fuel costs, such as airlines. An index of airline stocks fell 3.4 percent.

A bright spot among the otherwise dour economic data was a report by the National Association of Realtors, which showed U.S. pending home sales unexpectedly rose in June.

Trading volume was thin on the New York Stock Exchange, with about 1.23 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.22 billion shares traded, above last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by 3 to 1 on they NYSE and by 2 to 1 on the Nasdaq.

(Editing by Leslie Adler)