Shares Swoon on Bad News
The latest onslaught of bad news from corporate America sent stocks reeling Friday, knocking the Nasdaq composite index to a close below 1,900 for the first time since mid-April.
Trouble hit the “old” and “new” economies alike as earnings warnings from Dell Computer and Gap, an appellate court ruling against Microsoft and plans for massive job cuts by Ford reinforced the idea that an economic recovery this year looks unlikely, analysts said.
The technology-heavy Nasdaq tumbled 63.31 points, or 3.3%, to 1,867.01; the Dow Jones industrial average sank 151.74 points, or 1.5%, to 10,240.78; and the Standard & Poor’s 500 index slid 19.69 points, or 1.7%, to 1,161.97. Volume was light but breadth was weak, as losers swamped winners 2 to 1 on Nasdaq and 3 to 2 on the New York Stock Exchange. It was a fitting end to a week that saw the Nasdaq fall 4.6%, the Dow lose 1.7% and the S&P; 500 shed 2.4%.
Meanwhile, Treasuries rallied, sending the yield on the two-year note to a record low as skittish investors fled to bonds.
“Hopes for an economic recovery in the third quarter were pushed back to the fourth, then to the first quarter of next year, and now there’s a big question about even that,” said Ken Perkins, research analyst at earnings tracker Thomson Financial/First Call in Boston. “If this trend continues it doesn’t bode well.”
In the tech sector, Dell fell $2.38 on Friday to $23 after warning late Thursday of a third-quarter profit shortfall and saying it sees no sign of a pickup in business until at least the spring. Microsoft dropped $2.74 to $61.88 after the software giant lost a bid to delay its antitrust case.
Meanwhile, Ford lost $1.77 to $21.70 after announcing it would cut 5,000 jobs and issuing an earnings warning of its own, and rival General Motors fell $3.10 to $59.47, dragging down the Dow.
Gap sank $1.92 to $21.43 after noting in its warning that August sales remain sluggish.
Perkins noted that investors are looking for signs that the economy is getting a lift from the income tax rebate checks still being mailed, as well as from the Federal Reserve’s series of interest rate cuts this year--signs nowhere in sight.
The latest trade report issued Friday fueled speculation that second-quarter gross domestic product will be revised lower, perhaps to zero or below.
“The issue is clearly recession and not inflation, especially with energy costs easing,” said Michael Stead, manager of the SIFE Trust Fund, a financial services mutual fund based in Walnut Creek, Calif. “The good news is, that gives [Fed Chairman Alan] Greenspan room to maneuver.” Stead called a rate cut when the Fed meets next week a virtual certainty and a further cut later in the year a possibility.
John Derrick, portfolio manager at U.S. Global Investors in San Antonio, said signs of a recovery may materialize once the Fed stops cutting.
“That may be the inflection point,” Derrick said. “Businesses might stop postponing their purchases when they know rates have bottomed. Then they can start concentrating on ramping up for the next business cycle.”
Paul McCulley, portfolio manager at Pimco in Newport Beach, expects help from “double tax cuts from Uncle Sam and Uncle OPEC.” The $40 billion in tax rebates is expected to boost spending in the fourth quarter, and gasoline and other energy costs have stabilized.
“This economy is probably somewhere in the bottoming phase, and these are always the times when you see scary headlines and hear people saying they’ve given up hope,” said Jay Mueller, economist at Strong Capital Management in Milwaukee. “It’s natural.”
The Treasury rally drove the two-year note yield down from Thursday’s close of 3.72% to 3.64%--the lowest close in its 25-year history. The yield on the benchmark 10-year note fell from 4.94% on Thursday to 4.84%, its lowest since March 23.
Among Friday’s highlights:
* Chip stocks paced the S&P; 500’s decline, as Intel dropped $2.09 to $28.07, Broadcom sagged $4.13 to $37.06, Texas Instruments slipped $1.58 to $33.14 and Applied Materials lost $2.13 to $42.57.
Elsewhere in tech, IBM fell $1.16 to $104.59 and Cisco Systems lost 87 cents to $16.61.
* Merrill Lynch fell $1.88 to $50.12, its lowest close in more than a year, as the market’s slump weighed on the financial sector. Morgan Stanley Dean Witter declined $1.80 to $51.20 and Citigroup shed $1.28 to $46.60.
* In currency trading, the U.S. dollar continued to weaken against the euro, a trend that appears also to be hurting stocks. Analysts said foreign investors appear to be pulling money out of U.S. equity markets, dismayed by the collapse of the spring rally as well as the softening dollar. But the dollar rallied against the yen.
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Dog Days
August has been anything but hot for technology investors. The tech-laden Nasdaq has tumbled 8% this month.
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Nasdaq composite index, daily closes
Friday: 1,867.01, down 63.31
Source: Bloomberg News
