Stocks closed lower, led by financials, after brokers downgraded several big names in the sector, including American Express, saying that consumers are increasingly falling behind on their loan payments.
This followed one of the best weeks in nearly five years for the U.S. market last week. "After having had such a difficult market and seeing it recovering, it's time to contemplate whether all the problems have disappeared," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey, told Reuters.
The Dow Jones Industrial Average shed less than 1 percent, after a 3.9 percent gain from last week's rally. The Nasdaq and S&P 500 index also declined following last week's gains of 3 percent and 4.2 percent, respectively.
The Commerce Department reported that December U.S. factory orders rose 2.3 percent, the biggest gain since July, amid strong aircraft sales. Economists had expected the gauge to rise 2.6 percent. Orders for nondefense capital goods, which exclude aircraft and are considered a good measure of business spending, climbed 4.5%, the largest increase since March.
President Bush on Monday acknowledged that a weaker economy would lead to higher budget deficits as he unveiled a $3.1 trillion spending plan for fiscal 2009 that would nearly freeze domestic programs.
Cutting the Cards
American Express was one of the biggest drags on the Dow after UBS downgraded the credit-card provider -- as well as rivals Capital One and Discover -- to "sell" amid concerns about a consumer pullback.
In issuing the downgrade, UBS analyst Eric Wasserstrom wrote that a consumer-led recession in the first half of the year will lead to higher unemployment in 2008 and 2009. That could spur higher credit losses and, to a lesser extent, lower transaction volumes.
"Just because we get a couple of [interest-rate] cuts from the Federal Reserve, it doesn't mean that all of a sudden everything is better,'' Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Conn., told Reuters. "If anybody in the market is looking for a quick fix, we're not going to get it.''
Among other Dow decliners were J.P. Morgan, General Motors and Home Depot.
Some of the selling may have been attributed to profit-taking as financials, retailers and builders were among the leaders of last week's rally.
Among the few bright spots in the Dow Jones Industrial Average, Merck rebounded after getting hammered the past few weeks.
In other financial-sector ratings action, Goldman Sachs downgraded shares of Morgan Stanley to "neutral" and removed the stock from its "buy" list. Wells Fargo was among the big decliners on the S&P 500 after Stifel Nicolaus and Merrill Lynch slapped the stock with a "sell" rating. Stifel Nicolaus also downgraded two large regional banks, U.S. Bancorp and SunTrust Banks . Merrill Lynch also downgraded Wachovia.
Merrill analyst Ed Najarian wrote that home prices are falling much faster than expected in California, where both Wells Fargo and Wachovia have large operations. Wachovia, which bought mortgage lender Golden West Financial Corp in October 2006, may have to more than double its reserves for loan losses this year, Najarian added.
Morgan Stanley analysts said Monday that financial institutions are likely to get hit with $5 billion to $7 billion in losses related to their exposure to bond insurers, much lower than the $50 billion to $70 billion that had been projected.
Google shares declined after the Internet titan offered to help Yahoo fend of Microsoft's $44.6 billion bid.
Google CEO Eric Schmidt called Yahoo chief Jerry Yang to offer his company's help in any effort to thwart Microsoft's bid, according to a report posted Sunday on the Wall Street Journal Online. Neither company had any comment on the report.
Microsoft, meanwhile, told CNBC that it will wait for Yahoo's board to decide what is best for the company's future and that its offer is meant to create a very competitive business. The company also said that it plans to borrow some money for the cash portion of the deal -- not because it's short of cash, but rather -- to throw a bone to the nation's banks as they struggle to dig out of a lending crisis.
Microsoft's proposed acquisition of Yahoo would marry the world's biggest software maker with one of the leading Internet media companies, shaking up the market for online services such as email and advertising.
Google fired back at Microsoft on Sunday, accusing the software giant of seeking to extend its computer software monopoly deeper into the Internet realm.
David Drummond, a Google senior vice president and its chief legal officer, said in a blog post that the combination of Microsoft and Yahoo could undermine the open competition that has fueled Web innovation.
Analysts said Google's effort to raise antitrust concerns about the deal has several flaws.
Giants fans weren't the only ones flying high today. Morgan Stanley upgraded its rating on the airline industry, citing an improvement in a key airline gauge, revenue per available seat mile (RASM), notably from Continental Airlines . Calyon went out on a wing to say that the time has come for mergers in the airline industry, starting with Deltaand Northwest, and then Continental and United.
On the earnings front, Archer Daniels Midland, a leading U.S. food processor and ethanol producer, reported its net income rose 7.3 percent to $473 million, or 73 cents a share, from the year-earlier period, as higher commodity prices helped boost revenue.
Wendy's said its fourth-quarter earnings more than quadrupled from a year-earlier loss from discontinued operations despite sluggish sales and higher commodity costs. The fast-food chain has been considering a possible sale for nearly a year.
Meanwhile, Intel shares fell despite a report in Barron's that said the chip maker will probably generate double-digit annual earnings growth over the next several years and extend its lead over Advanced Micro Devices.
After the closing bell, News Corp. reported that its net ticked up 1.2 percent in the fiscal second quarter, in line with expectations, amid higher advertising sales at the Fox News Channel and Fox television network.
Yum Brands, parent of KFC, Pizza Hut and Taco Bell,is also slated to report after the bell.
--Reuters contributed to this report.