Trio of worries drags down stocks

NEW YORK —  Stocks slumped in a broad-based sell-off Monday as worries about the economy, housing and the presidential election weighed on the market.

The declines, however, might have been exaggerated by very low trading volume.

The Dow Jones industrial average sank more than 200 points. All 10 broad industry groups in the Standard & Poor’s 500 index were down, as were all 30 Dow stocks.

Insurance giant American International Group dropped 5.5% after an analyst predicted that mortgage-related write-offs could give the company a huge third-quarter loss.

Shares of Lehman Bros. Holdings tumbled 6.7% after a South Korean regulator expressed concern about a Seoul-based bank’s possible purchase of a stake in the New York investment bank.

“The concerns are the same ones that have haunted us for the last nine months,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “At the top of the list are worries about the financial sector.”

Volume was light Monday with many Wall Street traders on vacation in the Hamptons and elsewhere this week rather than at work on trading desks in lower Manhattan.

Wall Street’s annual diaspora typically results in wafer-thin trading activity and sometimes big market swings on seemingly inconsequential news.

“Light volume makes the market more vulnerable to the smallest breeze,” said Alan Gayle, investment strategist at RidgeWorth Capital Management in Richmond, Va.

But even if low volume exacerbated the declines, they show the vein of pessimism that is running through the financial markets.

The Dow skidded 241.81 points, or 2.1%, to 11,386.25. The S&P; 500 backtracked 25.36 points, or 2%, to 1,266.84. The Nasdaq composite index was off 49.12 points, or 2%, to 2,365.59.

Small stocks offered no solace, with the Russell 2,000 small-capitalization index sagging 2.3%.

Financial and housing stocks led the way down.

Housing stocks slid after the National Assn. of Realtors reported that although sales of existing homes rose a better-than-expected 3.1% last month, prices kept falling and inventories reached a record high.

Many analysts say financial firms are unlikely to stabilize until home values stop dropping, making it possible for investors and the companies themselves to judge the value of mortgages and related securities on their books.

AIG was stung by a Credit Suisse report predicting that the company could lose $2.4 billion this quarter on mortgage-related write-downs.

Fannie Mae and Freddie Mac provided a rare ray of light after Freddie successfully sold $2 billion in new debt and a Wall Street analyst said a government takeover of the two companies could be avoided. Freddie jumped 48 cents, or 17%, to $3.29. Fannie was up 19 cents, or 3.8%, to $5.19.

With the beginning Monday night of the Democratic convention in Denver, the presidential election also is weighing on stock prices.

Some investors worry that, if elected, Barack Obama would raise taxes, hurting corporate profits -- at least in the short term.

The recently reported tightening in the race could also be a negative for stocks.

“That the two candidates from a polling standpoint have moved closer together adds an element of uncertainty that is not helping the market,” Gayle said.

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walter.hamilton@latimes.com