Selling Wave Follows Fed’s Stay on Rates
Stocks caved in to a late sell-off Tuesday after the Federal Reserve left interest rates unchanged despite warning of weak economic conditions, disappointing traders who were hoping for an immediate cut aimed at shoring up the economy.
The Fed warning and falling stock prices pushed nervous investors to the Treasury market, where the benchmark long-term yield sank to a generational low.
“The Fed is saying the economic recovery is still intact, but unfortunately it’s a slow one, and any further weakness in equities could dampen growth in a major way,” said Mat Johnson, economist at Thomas Weisel Partners in San Francisco.
Though the central bank’s policymakers stopped short of cutting rates, they warned that the risks posed by slowing growth now outweigh those of inflation. That marked a shift from their prior stance that the risks to the economy were evenly balanced between weakness and inflation, and left the door open for future rate cuts.
“If the Fed is concerned, the stock traders are concerned,” said Art Bonnel, manager of the Bonnel Growth fund in San Antonio. “We think there is a good chance the Dow could hit 5,000, or maybe less, at which point the Fed would have to do something.”
Wall Street’s immediate reaction to the Fed was muted, but a selling wave in the last hour sent the Dow Jones industrial average down 206.50 points, or 2.4%, to 8,482.39, while the tech-oriented Nasdaq composite index closed off 37.56 points, or 2.9%, to 1,269.28. The broader Standard & Poor’s 500 index slid 2.2% to 884.21.
Losers swamped winners by more than 2 to 1 on both the New York Stock Exchange and Nasdaq. Volume was moderate.
In the bond market, the flight to government debt sent the yield on the benchmark 10-year Treasury note plummeting to 4.09%, from 4.21% Monday.
That broke through the lows set in November, when the Fed was cutting rates aggressively in the aftermath of the Sept. 11 attacks. Tuesday’s yield was the lowest for the 10-year note since 1963, according to Bloomberg News.
The yield on the 30-year T-bond also fell Tuesday, tumbling below 5% for the first time in nine months. Shorter-term yields declined as well.
Bond traders said some of the demand for long-term Treasuries stemmed from fears by owners of mortgage-backed bonds that those issues could be retired early as more homeowners refinance. To compensate for the potential early payoff of their mortgage bonds, some fund managers were locking in yields on Treasuries.
In the stock market, losses Monday and Tuesday stalled a rally that began last week in part because traders were betting on an interest rate cut at this week’s Fed meeting. The rally pushed the S&P; 500 up 5.1%--its biggest weekly gain since late September--and provided hope that the market’s brutal summer sell-off might be ending.
That level of Fed-inspired optimism mystified some investment pros, who questioned Tuesday whether another rate cut would have much effect on the economy and, by extension, the stock market. They point out that the Fed’s benchmark overnight bank lending rate is already at a 40-year low of 1.75%.
“Rates are so low at this point, what good would another quarter point do?” asked Carl Domino, manager of the Northern Large Cap Value fund in Chicago.
“The truth is that the economy is still expanding. It would be quick on the trigger to be firing off another rate cut,” said Frazier Evans, senior economist for the Columbia Management Group in Boston. “If you consider each quarter point to be a bullet, [Fed Chairman Alan] Greenspan only has seven left.”
Domino said some stock traders “may have just been selling on the news” Tuesday, while others may have been bailing out of the market in fear of surprises surrounding today’s deadline for more than 700 chief executives to certify their companies’ financial results.
“If you own stock in a company whose CEO doesn’t sign off on his financial statements, watch out,” Domino said.
As for the market’s near-term direction, Bonnel said today’s stock trading could offer telltale clues.
“If the market recovers, that would signal that [Tuesday’s] sell-off was simply a reaction by short-term traders to the Fed. But if the sell-off continues that would be the fundamental investors saying, ‘Whoa, maybe the economy is weaker than we thought--we’d better get out of this market.’ ”
In other trading Tuesday, the dollar rose against the yen and dipped against the euro. Oil and gold futures rose slightly.
Among other market highlights:
* Only two of the 30 Dow stocks finished higher. Big losers included United Technologies, down $5.98 to $62.47; Boeing, down $3.27 to $37.23; Honeywell, down $2.44 to $30.20; and Intel, down 83 cents to $16.70.
Wal-Mart Stores defied the trend, rising 30 cents to $48.71 after announcing a 26% jump in quarterly earnings, while IBM inched up 13 cents to $71.90.
* Six Flags plunged $6.80 at $5.06 after the amusement park operator’s second-quarter earnings fell shy of expectations.
* McAfee.com gained $2.05 to $14.89 after Network Associates raised its offer for the Internet security systems maker. Network Associates lost 67 cents to $10.34.
Market Roundup, C6-7
