Stocks extended steep losses, as the S&P 500 slid nearly 2 percent, as civil unrest in Egypt sparked widespread selling despite decent economic numbers.
The Dow Jones Industrial Average fell more than 165 points after touching 12,000 at the beginning of the session, and closing shy of that benchmarkfor the second straight session on Thursday. The last time the market closed above the benchmark was June 19, 2008.
Microsoft, Home Depot and Cisco fell.
The S&P 500 sank nearly 2 percent to below 1,280 after rising above 1,300 earlier in the session, while the Nasdaqdeclinedmore than 2.5 percent.
The last time the S&P 500 closed above 1,300 was Aug. 28, 2008. If the S&P 500 closes below 1,280.26 it will have closed below the prior eleven closes, a bearish sign, according to Rick Bensignor, market strategist at Dahlman Rose.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, skyrocketed more than 23 percent, to 20, the biggest spike in the VIX since June 4.
All key S&P 500 sectors sank, led by consumer discretionary, technology and telecom.
Stocks slumped as the protests in Egypt raised concerns the government was losing control, which would lead to instability in the region. The news was roiling markets worldwide.
The uncertainty surrounding the events also gave investors a reason to sell after five months of solid gains, and as the Dow and S&P bumped up against key thresholds, analysts said.
That and weak earnings news out of Amazon.com, Ford and Microsoft, provided another catalyst for investors to sell, said Ryan Detrick, senior technical analyst at Schaeffer's Investment Research.
The selling—which came from big institutions—was taking place amid significant volume, indicating more conviction in the moves, Detrick said.
"Egypt is definitely at the forefront today," agreed Paul Brigandi, senior vice president of portfolio management at Direxion Funds/Direxion Shares. "Overall, political unrest is never good for the market, especially when it has to do with the Middle East."
But the events in Egypt hit at a time when the market was bumping up against psychologically important benchmarks, and was beginning to "look fatigued" after rallying for some eight or nine weeks, said Brigandi, noting that the S&P 500 had been up 3 percent so far this year on top of a nearly 13 percent gain in 2010.
"The general consensus in the market is that a pullback was expected," Brigandi said. "And seeing a headline like this is giving people reason to believe this and sell risky assets."
In fact, many of the sectors that had outperformed in 2010—including the riskiest assets, such as small caps and emerging markets—fell the most on Friday. The Russell 2000 Small-Cap Index, for instance, slumped about 2.4 percent.
Commodities, however, spiked as investors returned to safer assets, including oil, gold and bonds. Gold prices rose above $1,325 an ounce and oil prices rose to more than $89 a barrel. The dollar , however, gained against a basket of currencies.
Nymex crude for March delivery gained $0.23 per barrel this week, or 0.26% to $89.34.
Apache, an independent energy company with significant exposure to Egypt, fell more than 4 percent earlier. The energy company's shares have fallen more than 8 percent since the protests began four days ago.
Also, stocks of tanker companies rose on speculation the Suez Canal could be closed as a result of the unrest in Egypt, which would boost demand for tankers. The Suez Canal is used to transit oil and fuel from the Persian Gulf to the West. Among the rising stocks were: Overseas Shipholding Group and General Maritime .
On the tech front, Microsoft unexpectedly reported earnings before the closing bell Thursday, with some analysts saying the tech giant's numbers were disappointing, as Windows sales came up short. The Dow component fell despite at least four brokerages raising their price target on the stock.
Amazon.com shares sank more than 7 percent despite Credit Suisse raising the Internet retailer's price target to $185 a share from $165. The firm delivered earnings results that disappointedinvestors after the market closed Thursday.
Another slew of major earnings before the bell on Friday again offered a mixed bag.
Ford Motor tumbled after the automaker reported earnings that fell short of expectations, in part because of a loss in its European operations.
Chevron fell slightly even after the oil giant reported a rise in profits on higher crude prices and the sale of its ownership stake in a pipeline company.
And Honeywell also declined even after the diversified manufacturer met analysts' profit expectationsand boosted its 2011 outlook. The company also said it would sell its automotive and consumer products unit.
Monster Worldwide plunged after reporting revenues in the first quarter fell below analyst expectations. (Read more: Monster CEO Fires Back).
Sara Lee fell after announcing it would split into two separate companies, since the company said it did not receive a high enough bid to justify a sale of the company. One company will focus on meats, such as the Jimmy Dean brand, and the other on international beverages and bakery items.
Meanwhile, Treasury Secretary Timothy Geithner defended U.S. policy at the World Economic Forum in Davos on Friday morning.
The gathering of business leaders continued on Friday.
Bank of America CEO Brian Moynihan told CNBC the financial giant does not need to raise fresh capital to comply with the new financial regulations, while the CEO of Royal Dutch Shell said that his company is poised to grow organically, when asked about a rumor that it had been considering bidding for BP during the Gulf of Mexico crisis. Both oil giants are expected to report earnings next week.
On the economic front, a reading of consumer sentimentfell from December, but was stronger than analysts had expected as consumers took heart from a strengthening economy and the prospect of jobs. The Thomson Reuters and the University of Michigan consumer sentiment index was 74.2 at the end of January, better than a preliminary reading of 72.7 and a median forecast of 73.2, according to economists surveyed by Reuters.
Meanwhile, the Commerce Department said that gross domestic product grew at an annual rate of 3.2 percentbetween October and December, below the 3.5 percent that analysts had forecast.
European markets closed loweras the Egyptian crisis unfolded.
On Tap Next Week:
MONDAY: Personal income and spending, Chicago PMI, Texas manufacturing outlook survey, Atlanta Fed President speaks, farm prices; earnings from ExxonMobil, Chrysler, Baidu.com.
TUESDAY: Auto sales, ISM manufacturing index, construction spending; Earnings from BP, Pfizer, UPS, Aflac, Broadcom and Electronic Arts.
WEDNESDAY: Weekly mortgage applications, Challenger job-cut report, ADP employment report, oil inventories; earnings from Marathon Oil, Mattel, NewsCorp., Visa and Yum Brands.
THURSDAY: Chain store sales, ECB announcement, jobless claims, productivity and costs, factory orders, ISM non-manufacturing index, Bernanke at National Press Club, Minneapolis Fed President speaks, Verizon begins iPhone pre-orders; earnings from GlaxoSmithKline, Merck, Royal Dutch Shell, Sony, Unilever, MasterCard and Sunoco.
FRIDAY: Nonfarm payrolls; earnings from Aetna.
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