Gloomy Profit Outlooks Push Stocks Lower
Fresh worries about corporate earnings pushed stocks overall lower Wednesday, even though the Federal Reserve Board evidently decided against raising interest rates.
Bond yields, however, responded to the Fed’s lack of action: Shorter-term yields pulled back.
On Wall Street, the Dow Jones industrials lost 17.36 points to 5,703.02, as losers edged winners by 12 to 11 on the Big Board.
The Nasdaq market of mostly smaller stocks continued to suffer heavier selling, with the composite index falling 9.55 points, or 0.8%, to 1,181.60.
The market was hurt by another rash of disappointing second-quarter earnings “pre-announcements” from some technology companies, and by growing fears that auto companies’ profit margins are headed for another squeeze.
“You’re losing the underpinning of the [stock] market,” said Ric Dillon, a money manager in charge of $110 million at his firm in Columbus, Ohio. “The bull market was a function of two things: strong earnings and declining interest rates. Earnings have stopped growing and interest rates have stopped declining. Given that, the market’s vulnerable.”
Other analysts, however, say Dillon is oversimplifying, and that earnings should continue to rise this year at many companies, albeit at a slower pace.
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In any case, earnings jitters overwhelmed any satisfaction investors may have gotten from the Fed’s decision to leave short-term interest rates alone for now.
The Fed wasn’t expected to raise rates, despite the economy’s recent surprising strength. Many economists argue that the Fed needs more data before concluding that the economy is strong enough to threaten significantly higher inflation.
Still, shorter-term bond yields declined after the Fed adjourned its meeting Wednesday, indicating that some investors were relieved. The yield on six-month Treasury bills dipped to 5.40% from 5.48% Tuesday.
Longer-term yields were off only slightly. The bellwether 30-year T-bond yield eased to 6.93% from 6.94% Tuesday.
Stock prices did improve somewhat with falling yields. The Dow had been off as much as 38 points.
Markets will be closed today for Independence Day. On Friday stock markets will close early, at 10 a.m. PDT.
Among Wednesday’s highlights:
* A chorus of tech companies issued warnings about lower second-quarter earnings, including Southland-based data-management systems firm FileNet, which plunged 9 1/4 to 23 3/4 after initial confusion late Tuesday about the company’s announcement about its results.
Elsewhere, Zoom Telephonics, a maker of computer modems, sank 4 1/2 to 11 1/2 after warning of weaker orders. And Digi International, a data communications equipment maker, slumped 9 1/4 to 16 3/4 after saying foreign orders have slowed sharply.
* Among bigger tech firms, Hewlett-Packard fell 3 3/8 to 94 1/8 after brokerage Morgan Stanley trimmed 1996 and 1997 earnings estimates and downgraded the stock to “neutral.”
* The Big Three auto stocks tumbled after Salomon Bros. said the companies’ profit margins may be squeezed by rising competition. Also, the companies have recently reported mostly weaker June sales.
Chrysler dove 3 5/8 to 59 7/8, GM sank 1 5/8 to 52 1/8 and Ford was off 1 5/8 to 31 7/8.
* Retailer Ann Taylor dropped 2 1/8 to 18 1/8 after analysts lowered second-quarter sales estimates.
* On the plus side, bank stocks were higher as the Fed left rates alone. NationsBank rose 5/8 to 84 5/8, Bank of Boston jumped 7/8 to 51 3/4 and BankAmerica added to 78.
* Telebras, the Brazilian phone giant, saw its U.S.-traded shares soar 2 1/8 to 74 5/8 after the company reported stronger-than-expected earnings. In Sao Paulo, the key Brazilian stock index surged 1.8%.
In currency trading the dollar eked out more gains against the yen, reaching a 29-month high for a second day, after Japan’s top central banker again suggested interest rates won’t rise soon.
The dollar rose as high as 110.69 yen, its highest since Jan. 26, 1996, when it reached 111.05 yen. In New York afternoon trading, the dollar was at 110.41 yen, little changed from 110.33 yen late Tuesday.
Market Roundup, D5
