Stocks Slump as Rate Hike Sinks In
So much for that Fed relief rally.
Stocks slumped Wednesday on light volume after four days of gains, as long-term bond yields rose anew one day after the Federal Reserve boosted short-term interest rates sharply.
Although Wall Street on Tuesday shook off the Fed’s rate hike and closed broadly higher, sellers dominated for most of the session Wednesday.
Big-name technology stocks again led the market lower, as some traders apparently cashed in their gains from the stocks’ recent rebounds.
The Nasdaq composite index lost 72.61 points, or 2%, to 3,644.96, though it had been as low as 3,616.
Losers topped winners by 5 to 3 on Nasdaq, as volume slowed to 1.2 billion shares.
The Dow industrials fell 164.83 points, or 1.5%, to 10,769.74.
The Nasdaq had risen 3.1% on Tuesday, and the Dow 1.2%, even as the Fed raised its benchmark short-term interest rate to 6.5% from 6%, the biggest move in five years.
Some analysts said investors were simply relieved that the Fed did what was widely expected. What’s more, Wall Street’s bulls have been arguing that the central bank is closer to the end of its credit-tightening cycle than to the beginning.
The Fed, seeking to slow the economy and keep inflation pressures at bay, has raised rates six times since last June.
But the central bank gave a clear indication in its statement Tuesday that it isn’t finished.
And long-term bond yields turned up Wednesday, as traders worried about how much more the Fed will do. The yield on the 10-year Treasury note rose Tuesday to 6.49% from 6.42%.
“The [bond] market now believes that the Fed is going to have to be even more aggressive than before because they think inflation and growth are still big problems,” said Ted Neild, who oversees $40 billion in fixed-income at Nuveen Investments in Chicago.
The stock market, meanwhile, “is supposed to have a difficult time when the Fed is raising rates,” reminded Robert Streed, senior investment counselor at Northern Trust in Chicago. “The old adage says, ‘Don’t fight the Fed,’ and I think people forgot that for a while.”
Stocks have, in fact, suffered while the Fed has been raising rates in an attempt to slow the economy’s growth to a more sustainable pace. Gail Dudack, chief equity strategist at UBS Warburg, pointed out that in the 11 volatile months since the Fed began raising rates, the Dow has declined about 2%--a sharp contrast with the double-digit annual gains it enjoyed in the late 1990s.
The Nasdaq, which made a history-making surge in late 1999 and early 2000, is up about 36% since June 1999. But the index has tumbled a dramatic 28% from its all-time high of 5,048.62, set March 10.
Among Wednesday’s highlights:
* Major tech stocks slid, including IBM, down $1.13 to $107.88; Cisco Systems, down $2.56 to $58; Microsoft, down $1.81 to $67.69; and Apple, down $4.31 to $101.38.
Hewlett-Packard set a poor tone for the sector, falling $8.44 to $130.06 even after it reported that second-quarter earnings topped Wall Street analysts’ expectations. Testy investors may have been expecting Hewlett-Packard to more dramatically exceed published estimates, analysts said.
* In the telecom sector, Qualcomm fell $5.53 to $103.16, Scientific Atlanta lost $2.75 to $59.63, Ciena dropped $8.56 to $144.13 and Nokia eased $1.50 to $55.
Also, AT&T; eased 63 cents to $38.13 after Salomon Smith Barney cut its 2001 earnings estimate to $2.55 a share from $2.75. AT&T; is facing higher sales, general and administrative costs, the firm said.
* Retail stocks fell a day after many of the firms reported quarterly earnings. Home Depot lost $1.19 to $52.25, Target fell $1.69 to $69.63, Best Buy lost $3 to $75.06 and Limited slid $1.19 to $48.44.
* Utility stocks, a sector many investors have been buying into in a search for “safe haven” stocks, also gave ground. American Electric Power lost $1.19 to $35.06 and Consolidated Edison fell $1.13 to $32.50.
* Among Southland issues, Countrywide Credit slid $3.31 to $30.44. It had soared $6.06 on Tuesday after the mortgage firm’s CEO said the company could be for sale at the right price--though he said that didn’t represent a change in his views.
Also, Imperial Bancorp tumbled $3.19 to $19.06. Brokerage Jefferies & Co. downgraded the stock to “hold” from “accumulate,” citing growing loan chargeoffs.
On the plus side, Northrop Grumman continued its ascent, up $3 to $79.25, a 52-week high.
Overseas, most foreign markets fell in the wake of the Fed’s move. The Mexican market gave up 2.8%; German shares fell 2.2%.
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Market Roundup, C9-C10
