Stocks fall on Bernanke's bank-trouble comments

NEW YORK — Stocks dropped sharply today, breaking the Dow Jones industrials' four-day winning streak as investors fretted over a rise in unemployment claims and the prospect of more bank failures.

The Dow sank 112.10 to close at 12,582.18.

Microsoft, one of the 30 Dow stocks, fell 33 cents to close at $27.93 a share. Boeing, also a Dow stock, gained 85 cents to $84.80.

Broader stock indicators also lost ground. The Standard & Poor's 500 index declined 12.34 to 1,367.68, and the Nasdaq composite index lost 22.21 to 2,331.57.

Federal Reserve Chairman Ben Bernanke said in testimony to Congress today that while large U.S. banks will likely recover from the recent credit crisis, other banks are at risk of failing. Three small U.S. banks have already failed since the summer, when the lending industry started losing billions of dollars as mortgage defaults soared.

"Implying that some banks may fail stirs concerns for any investor who's familiar with financial and economic history," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. "Investors have been very edgy about credit market conditions and banks' financial conditions. Very edgy. And this doesn't remove that edginess."

Earlier, stocks had fallen in response to a Labor Department report that first-time unemployment claims rose last week by 19,000 to 373,000, the highest level since late January.

Scott Wren, equity strategist for A.G. Edwards & Sons, said he still believes there's less than a 50 percent chance of a recession, but that it's clear employers are cautious about hiring.

"To consistently see claims up near 400,000, that's pretty telling oftentimes of a recession," he said.

Bernanke offered up some positive comments in his testimony — that inflation should ease, that the United States is nowhere near the stagflation scenario of the 1970s, and that most banks will bounce back from their mortgage troubles. When stagflation is present, the economy remains weak as inflation accelerates.

But Wall Street was skeptical of Bernanke's fairly upbeat take on the economy — particularly as oil and gold hit new records — and latched onto his admission that more banks could fail.

"Bernanke is about as skillful a Fed chairman as I have seen," said Johnson, who said his more than four-decade career spans six Fed chairmen. "But these times require a very, very skillful chairman. I don't believe I've seen times as challenging as these."