Dow, Nasdaq Fall on Fed’s Decision to Hold Off on Cutting Interest Rates
The Federal Reserve declined to play Santa Claus on Tuesday, leaving investors with what many viewed as a lump of coal.
Major stock indexes surrendered a morning rally to close mostly lower after the Fed decided against cutting its key interest rate, though it strongly hinted that the weakening economy points to rate cuts in 2001.
In very heavy trading, the Nasdaq composite sank to a new 16-month low, and the Standard & Poor’s 500 fell to its lowest level in more than a year.
“Some optimists had gotten out there thinking we were going to get a rate cut,” said Timothy Swanson, who helps manage $40 billion for Wachovia Asset Management in Winston-Salem, N.C.
The Dow Jones industrial average, which shot up 210 points Monday, was up 139 points at midday Tuesday before the Fed made its announcement. Stocks immediately plunged, quickly rallied back somewhat, then slumped again for the rest of the session, with the Dow closing down 61.05 points, or 0.6%, at 10,584.37.
The technology-laden Nasdaq composite index was up 72 points Tuesday before the Fed spoke, then crumbled to close off 112.81 points, or 4.3%, at 2,511.71.
For Nasdaq, the pain just keeps getting worse: Many analysts thought the index had finally bottomed Nov. 30, when it hit a low of 2,523 intra-day.
With Tuesday’s close, Nasdaq is down 50.2% from its record high of 5,048 reached March 10.
Analysts say many investors may be figuring the Fed will eventually ride to the market’s rescue with rate cuts. In the interim, however, the continuing stream of companies warning of weaker earnings is overriding any longer-term optimism, especially in the tech and telecom sectors.
“The market’s worried about earnings, and [Tuesday’s performance] tells us that it isn’t going to get better any time soon,” said Gary Kaltbaum, a technical analyst at JW Genesis.
Among the companies warning about earnings Tuesday was telecom giant SBC Communications, whose shares slid $6.75 to $46.56 after the firm reduced its earnings estimates for 2001.
Nasdaq was dragged lower by some of its biggest names, including Microsoft, which fell $3 to $44.81 despite news reports that the company plans sharp cost cuts in 2001. Other losers among major techs included Cisco Systems, down $1.19 to $41.75; Yahoo, down $4 to $28; JDS Uniphase, down $7.44 to $51.75; and Siebel Systems, down $15 to $63.38.
Losers topped winners by 2 to 1 on Nasdaq.
On the New York Stock Exchange, however, winners and losers were nearly even.
Some investors were buying depressed heavy-industry stocks in an apparent bet that the Fed will be successful in engineering a “soft landing” for the economy in 2001--meaning a slowdown, followed by another pickup in growth.
Among the winners among “old-economy” stocks Tuesday were USX-U.S. Steel, up 69 cents to $16.75; copper giant Phelps Dodge, up $1.31 to $55.25; and Dow Chemical, up $2.06 to $33.88.
The Fed’s statement “shows a bit more awareness about the slowing and says [it] is more likely to come in and help,” said Jim Paulsen, investment chief at Wells Capital Management.
But those old-economy stocks, analysts note, would be vulnerable if the economic slowdown turns into recession.
Some investors continue to snap up classic “defensive” stocks that have historically fared reasonably well in weak economies. Food, drug and utility shares, for example, rallied Tuesday.
Many bank stocks also gained on optimism about an eventual Fed rate cut. Washington Mutual rose 50 cents to $50.63; Citigroup added 88 cents to $50.25 and FirstFed Financial jumped $1.75 to $29.38.
Meanwhile, in the Treasury bond market, yields ended mixed, with shorter-term yields easing while longer-term yields inched up. Treasury yields have tumbled in recent weeks in anticipation of Fed rate cuts in 2001.
The dollar was little changed against the euro and the yen.
Market Roundup: C9, C10
* CONCERN SWITCH
Fed’s statement shows it’s now worried about too little economic growth. A1
* RATE FACTORS
Answers to common questions about a Fed change in interest rate policy. C4
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Another Low
The Nasdaq composite stock index slumped 4.3% on Tuesday to its lowest since August 1999, dragged down by some of the tech field’s biggest names.
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Weekly closes and latest for the Nasdaq composite
Tuesday: 2,511.71
Source: Bloomberg News
