Stocks Drop as Investors Fear Rising Interest Rates
Stocks suffered their biggest losses in a month and bond yields rose sharply Wednesday on fears that rising interest rates will slow the economic recovery and damp corporate profit growth.
Wall Street’s mood also was darkened by a downbeat earnings forecast for tech bellwether Intel by brokerage Salomon Smith Barney.
The Dow Jones industrial average fell 133.68 points, or 1.3%, to 10,501.57. The broader Standard & Poor’s 500 index dropped 18.44 points, or 1.6%, to 1,151.85.
The tech-laden Nasdaq composite index lost 48 points, or 2.6%, to 1,832.87.
It was the biggest percentage loss for both the S&P; 500 and Nasdaq in a month.
Losers led winners by 2 to 1 on the New York Stock Exchange and by 3 to 2 on Nasdaq. Trading was moderate.
The market’s slippage followed the Federal Reserve’s decision Tuesday to leave interest rates unchanged, although the central bank hinted of possible increases later this year.
Though stocks rallied Tuesday, “it often happens after a Fed meeting that investors think about it overnight and next day react differently,” said Joe Stocke, chief investment officer at StoneRidge Investment Partners. Now, “they see rate increases down the road.”
That belief was bolstered by another dose of positive economic news Wednesday. U.S. housing starts in February climbed at their fastest pace in more than three years, the government said.
The housing report, and accompanying concerns that the Fed may begin raising interest rates this year, drove bond yields higher.
The yield on the 10-year Treasury note, a benchmark for home mortgages, rose to 5.41% from 5.29% Tuesday. The yield on the two-year T-note, one of the most sensitive to Fed rate moves, rose from 3.54% to 3.67%--the highest since Sept. 5.
Despite investors’ qualms about rising rates, some analysts have noted that stocks can perform well during periods of tightening credit--as long as corporate earnings are robust.
Much of Wednesday’s selling was focused on tech shares. Intel, a Dow component, declined $1.19 to $30.53 and was the second most-active issue on Nasdaq. Salomon cut its earnings forecast on the leading computer chip maker, citing lower seasonal demand and a possibility of lower nonoperating income. The gloom rubbed off on other issues and sent the SOX semiconductor index down 3.7%.
Other tech losers included IBM, off $1.99 to $105.50, and Microsoft, down $2.13 to $60.10.
In other market news:
* Some brokerages slumped after reporting quarterly results that disappointed Wall Street and on worries that higher rates will cut into the value of the companies’ bond holdings. Lehman Bros. lost $1.30 to $64.93 after posting a drop in quarterly earnings amid an unabated decline in stock underwriting. Bear Stearns fell $1.05 to $62.10, even after the firm said fiscal first-quarter profit rose.
* Bristol-Myers Squibb’s shares tumbled $7.57 to $41.08--a 16% loss--after researchers said its experimental drug Vanlev was not better in treating heart failure than a treatment made by Merck. Merck lost 34 cents to $58.08.
* ViroPharma’s shares dropped 59% after a government advisory panel rejected the company’s most advanced product, the experimental cold medicine Picovir. The shares dropped $7.91 to $5.50 and the stock was the biggest percentage decliner on U.S. markets.
* Airline stocks fell on fears U.S. airlines may be adding flights faster than the current economic recovery warrants. The Amex airline index was down 4%, reflecting losses in Delta Air Lines shares, off $1.44 to $32.64, and others.
* Red Hat, provider of the Linux computer operating system, sank $1.22 to $5.58 after reporting lower-than-expected quarterly sales even as earnings met estimates. Among other software stocks, Siebel Systems lost $3.22 to $31.58.
* Alcon, the eye-care unit of Nestle, priced its initial stock offering at $33 each. The shares will begin trading on the NYSE today under the symbol ACL.
Market Roundup, C6-7
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