Stocks post worst drop in three weeks

By Angela Moon

NEW YORK (Reuters) - Stocks posted the worst day in three weeks on Thursday on mounting evidence that slowing manufacturing growth worldwide threatened corporate profits.

Shares of energy and materials companies led declines as commodity prices fell. U.S. crude futures slipped below $80 a barrel for the first time since October and the S&P energy sector index (.GSPE) lost 4 percent. Investors said weak overseas demand was responsible for the decline in those industries.

Stocks' slide was accelerated by a bearish call from Goldman Sachs, which recommended clients build short positions in the broad S&P 500 index on expectations of more economic weakness.

"We are recommending a short position in the S&P 500 index with a target of 1,285," (roughly 5 percent below current levels), Goldman Sachs said in a note.

The investment bank cited the Philly Fed's mid-Atlantic factory index, which fell to minus 16.6 in June, an unexpected contraction in the region's factory activity.

Semiconductor stocks weighed on the Nasdaq after chipmaker Micron Technology Inc (MU) posted a net loss for the fourth straight quarter. Micron lost 7.8 percent to $5.65 and the PHLX semiconductor index (.SOX) dropped 4.1 percent.

Stocks had enjoyed a two-week run that brought the S&P up more than 7 percent on hopes for additional stimulus from the Federal Reserve.

Business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed growth by U.S. factories.

"While we've seen only two of many regional manufacturing surveys for June, there is a clear deterioration taking place, with only the degree being the broad issue," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

The KBW Bank Index (.BKX) fell 2.3 percent amid expectations Moody's Investors Service would announce downgrades in the banking industry.

The Dow Jones industrial average (^DJI) was down 251.35 points, or 1.96 percent, at 12,573.04. The Standard & Poor's 500 Index (^GSPC) was down 30.19 points, or 2.23 percent, at 1,325.50. The Nasdaq Composite Index (^IXIC) was down 71.36 points, or 2.44 percent, at 2,859.09.

The day's decline was the worst since June 1 when the S&P 500 fell 2.5 percent.

"The market was extremely overbought coming into this week, and the news gave it an excuse to sell off," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

Softening data globally lifted hopes of central bank action to support the economy. The U.S. Federal Reserve announced on Wednesday it would extend one monetary stimulus program and said it was ready to do more to help economic growth if necessary.

"Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term," Goldman Sachs said.

U.S. home resales fell in May and the four-week moving average for new unemployment insurance claims rose last week to the highest level since early December.

Celgene Corp (CELG) slumped 11.5 percent to $59.45 after the company said it was withdrawing a European application for wider use of its big-selling Revlimid blood cancer drug.

Philip Morris International (PM) lost 3.3 percent to $85.62 after forecasting full-year earnings below Wall Street estimates, saying a strong dollar has hurt sales abroad.

After the bell, Moody's Investors Service cut the credit ratings of 15 of the world's biggest banks in a highly anticipated move that was part of a broad review of major financial institutions.

Among the moves, Moody's cut JPMorgan Chase & Co's (JPM.N) long-term senior debt to A2 from Aa3 and assigned it a negative outlook negative. It also cut Morgan Stanley's (MS.N) long-term senior unsecured debt to Baa1 from A2 and also assigned it a negative outlook.

Shares of JPMorgan added 1.4 percent to $36.00 and Morgan Stanley added 3.2 percent to $14.41 in extended trade.

About 7 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 7.84 billion.

(Reporting By Angela Moon; Editing by Kenneth Barry and Dan Grebler)

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