Stocks closed the week broadly lower as Wall Street pondered the fate of two failing hedge funds managed by Bear Stearns, while losses were compounded on Friday by adjustments in several key indexes.
"Forty-five to 50 stocks are going into the Russell 1000, that has to be funded by selling something else and has to put pressure on the 950 other stocks in the Russell 1000," said Jenkins Marshall, head of program trading at Knight Capital Group. "Today it's putting undue pressure on the downside."
The top 10 holdings in the large-cap Russell 1000 index are all Dow components.
In addition, 270 stocks were added to the Russell 2000 small cap index, while Standard & Poor's also revised its index of 500 of the largest U.S. companies following the split of Tyco International and Flextronics' acquisition of Sanmina-SCI.
The Dow Jones Industrial Average snapped a streak of 13 consecutive higher Fridays, falling more than 180 points, or 1.3%, while the S&P 500 saw similar declines. The Nasdaq Composite declined 1.1%.
The Dow declined 2.1%, the S&P 500 ended with a weekly decline of 2.0% and the Nasdaq fell 1.4% for the week.
Traders also attributed losses to concerns that the potential liquidation of two Bear Stearns mortgage debt funds may spread to other financial institutions that hold subprime mortgages.
Bear Stearns said on its midday call that its financial situation remained strong and that it does not see material impact on the company from market pressures. Bear plans a $3.2 billion rescue for one of its faltering hedge funds. Worries about the fund and the seizure of collateral by lenders has created nervousness across credit markets all week.
"There's more folks out there that have exposure to the subprime problem," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "Bear Stearns isn't the only one. Sooner or later, it's going to affect somebody."
Todd Leone, head of listed trading at Cowen & Company, downplayed the effect of Bear Stearns woes and attributed Friday's decline more to the Russell annual index re-rebalancing.
"Usually where there's smoke there's fire but it seems like the market is taking it in stride," he said, "but it's tough to determine at this point."
Adding to Friday's negative investor sentiment was Congress' recent introduction of a tax bill to charge hedge funds on carried interest, said Art Cashin, director of floor operations at UBS.
Selling was across the board with all ten S&P economic sectors in the red, led by the influential financials sector with declines of 2% or more seen for Goldman Sachs, Merrill Lynch and JPMorgan Chase.
Breadth was negative with decliners outpacing advancers by more than three to one on the New York Stock Exchange.
"We've got the interest rate issues with the bond jitters and subprime mortgage," said Stephen Porpora, managing floor broker at William O'Neil. "And the Russell 2000 rebalancing is a big deal and everybody's a little nervous about that."
Bond yields remained elevated amid concerns about the subprime mortgage sector and rising global interest rates. The yield on the 10-year Treasury note rose as high as 5.21% before settling back to 5.14%.
The most anticipated initial public offering of 2007 was one positive highlight on Wall Street today. Private-equity firm Blackstone kicked off its first day as a publicly-traded stock Friday. Blackstone shares closed their first day of trading at $35.06, an 13.1% gain to its $31 offering price, making it the largest IPO in five years.
Shares of Jabil Circuit rose after the contract electronics manufacturer reported an adjusted fiscal third-quarter profit that topped Wall Street expectations. The stock was also upgraded by Credit Suisse and RBC Capital Markets.
Consolidation in the news media was also in the spotlight as Rupert Murdoch's News Corp. edged closer to securing Dow Jones, when General Electric and Pearson decided not to pursue a joint offer for the news provider.
Meanwhile, shares of Macy's rose more than 6% on speculation private equity firms may be mulling a bid for the apparel retail giant. A Macy's spokesperson told CNBC they do not comment on rumors.
New York light sweet crude futures rose as markets monitored talks betweeen the Nigerian government and labor union officials to end a general strike in Africa's largest crude producer.
European Stocks Lackluster
European stocks were modestly lower Friday as merger and acquisition news took focus, but concern over conflict at the EU Summit weighed on sentiment.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX were down slightly.
The land grab for stock exchanges heated up as NYSE Euronext reportedly put in a preliminary rival bid for Borsa Italiana, according to the Wall Street Journal Web site.
The offer from the first trans-Atlantic exchange would match one made by the London Stock Exchange Thursday of $2 billion for the Milan-based bourse, the Journal said, citing people familiar with the matter.
On the economic front, German business sentiment in June fell below expectations of analysts' polled by Thomson Financial, as the Ifo research institute said that June results were down from the previous months.
In political news, European leaders are wrangling with numerous contentious issues at the second day of an EU Summit in Brussels as Poland looked set to call for limitations to EU powers and a key competition objective was scrapped.
Asian Stocks Lower
Asian benchmarks fell across the board in the afternoon session as investors cashed-in on recent gainers.
Japan's Nikkei 225 fell 0.3% as investors took profit from major real estate plays like Mitsubishi Estate and Mitsui Fudosan. But chipmakers like Advantest and Tokyo Electron continued to rally after the Philadelphia Stock Exchange Semiconductor Index leapt 3% to its highest level in a year.
South Korea's KOPSI also slipped, falling 1.3%. Korea Exchange Bank shares dropped on reports majority shareholder Lone Star sold 13.6% of its stake in the lender at a discounted price. Hana FinancialGroup announced that it took part in an overnight block trade to purchase 1% of KEB shares.
Hong Kong's Hang Seng Index struggled to stay above the record 22,000 level it broke during the intraday session. The Shanghai Composite Index shed 3.3%.
Two IPOs in focus moved in opposite directions. Hong Kong-listed RREEF China Commerical Trust tumbled 10% below its inital price of HK$5.15 due to waning demand for property trusts. But Singapore's Cosmosteel Holdings shares more than tripled to S$0.685.