Fed Move Fails to Cheer Investors
Stocks plunged again Tuesday, putting key indexes within striking distance of the two-year lows reached in April, after the Federal Reserve cut interest rates but sounded a somber tone for the economy.
The Nasdaq composite index lost 50.05 points, or 2.7%, to 1,831.30; the Dow Jones industrial average fell 145.93 points, or 1.4%, to 10,174.14; and the Standard & Poor’s 500 index sank 14.15 points, or 1.2%, to 1,157.26.
Tuesday’s swoon indicated once again that Wall Street remains unimpressed with the Fed’s rate-cutting program, which began Jan. 3. Despite seven rate cuts, corporate profits are still moribund, and investors aren’t convinced they will revive any time soon.
“We see no signs of a bottom in the economy,” said Frank Gretz, market analyst at Shields & Co. in New York. He pointed to weakness in industrial commodities prices, the renewed plunge in semiconductor stocks in recent weeks, and dismal recent earnings announcements from companies as varied as Ford Motor, Gap and Dell Computer.
Even shares of home builders, which had been holding up well, have begun to crumble of late, Gretz said.
It didn’t help that the Fed--while cutting its key short-term interest rate target Tuesday by a quarter point to 3.5%--warned the U.S. economy may slow further in the coming months, analysts added.
Most major stock indexes had rebounded in spring after hitting two-year lows in early April, after a yearlong slide. Falling below those April troughs--or even lower--could spook investors who thought the bear market had run its course, analysts said.
“If the Dow were to drop, say, below 9,000 and people saw the first number being an ‘8,’ that might cause investors to throw in the towel,” said Chip Hanlon, president of Unfunds Inc., a Huntington Beach investment advisory firm.
“That might get people to finally say, ‘Wow, there are no safe havens. I’m outta here.’ And that might be the washout this market needs to really bottom out.”
To pierce their lows of late March and early April, the Nasdaq would need to fall only an additional 11%, the Dow 8% and the S&P; 500 an additional 5%.
There already are indications that more individual investors are losing faith, said Christopher Low, chief economist at First Tennessee Securities in New York.
He pointed to the huge recent flow of money into old-fashioned bank deposits, which Low said represents small investors “throwing in the towel and going back to a more traditional approach to savings.”
Though flows of cash into stock mutual funds have been modestly positive this year, there has been a marked turn away from online trading and other do-it-yourself stock-market investing, Low added.
The Fed rate cuts are expected to take nine to 12 months to start working their way into the economy. For now, analysts’ corporate earnings expectations remain “in free fall,” said Chuck Hill, research director at earnings tracker Thomson Financial/First Call in Boston.
Companies are issuing earnings warnings at a record pace this quarter, Hill noted. So far, 329 companies have made third-quarter “confessions,” compared with 303 at this point in the record-setting first quarter.
Hopes are being pinned on a profit pickup in first-quarter 2002.
“Late September and early October, when companies begin to have visibility for the first quarter, will be fish-or-cut-bait time,” Hill said. But even for the first quarter, analysts’ average estimate of S&P; tech-company earnings, for example, already has been ratcheted down to 9% growth from 32% as recently as July 1.
Even one of Wall Street’s leading bulls, Goldman Sachs’ market strategist Abby Joseph Cohen, tempered her optimism Tuesday. Cohen lowered her profit forecast and year-end price target for the S&P; 500, citing the listless economy. She cut her S&P; earnings estimate by about 10% and trimmed her price target to 1,500 from 1,550, which nonetheless would represent a healthy jump from current levels.
In Tuesday’s trading, losers outpaced winners by a 5-to-4 margin on the New York Stock Exchange, and by almost 2-to-1 on Nasdaq. Volume was moderate.
In other markets, Treasury yields fell again as some traders took the Fed’s statement as a signal that more interest rate cuts may be in store. The yield on the benchmark 10-year note eased to 4.86% from 4.90% Monday.
The U.S. dollar weakened against both the yen and the euro.
Among the highlights:
* Retailers were hit hard, as Wal-Mart Stores sagged $1.65 to $49.94, while American Eagle Outfitters sank $9.06 to $23.21 after issuing a profit warning, citing slow sales of its teen-oriented clothing.
But Coach rallied 92 cents to $34.04 after the luxury-goods maker was upgraded to “strong buy” by UBS Warburg, which cited potential for strong overseas sales growth.
* Financial stocks took a pounding. American Express lost $1.55 to $36.60 and Goldman Sachs Group fell $2.44 to $75.40.
* Tech stocks sank as hopes for a quick pickup in business spending grew thinner. Microsoft slid $1.92 to $60.78, Cisco Systems skidded 89 cents to $16.01, Yahoo lost $1.45 to $13.01, and Siebel Systems dropped $2.61 to $23.51.
The Interactive Week Internet stock index declined 4%, leaving it just 2% above its April 4 low.
Among Southland tech companies, Broadcom fell $4.73 to $33.06, Vitesse Semiconductor slid $1.75 to $13.23 and Conexant Systems shed 85 cents to $9.63.
* Drug maker Immunex gained 64 cents to $16.86 after reporting improvement in patients treated in clinical studies with its arthritis drug Enbrel.
* Calpine surged $1.63 to $29.90 after reaffirming plans to double its capacity to generate electricity in North America by 2005.
Market Roundup, C6, C7
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