Wall Street Doused With June Gloom
Wall Street’s spring rally has hit a patch of rough road.
Blue-chip stocks fell Monday for the third session in the last four, raising concerns that more investors are moving to take profits from the powerful advance of the last three months.
Another wave of jitters over the corporate profit outlook helped drive the Dow Jones industrial average down 127.80 points, or 1.4%, to 9,072.95, though it recovered from a drop of as much as 162 points.
The Dow has given up 250 points, or 2.7%, since reaching an 11-month closing high of 9,323.02 one week ago.
The Nasdaq composite index, which slumped 33.97 points, or 2.1%, to 1,610.75 on Monday, has fallen for three straight sessions, shaving 4% from the one-year high reached Wednesday.
The Standard & Poor’s 500 index, off 14.05 points, or 1.4%, to 981.64 on Monday, is down 3% from its one-year high reached a week ago.
The setback in recent sessions is the largest since the S&P; lost 5.3% between March 24 and 31. Stocks mostly powered higher in April, May and early June with few sell-offs along the way.
But on Monday, falling stocks outnumbered winners by a hefty 3-1 ratio on the New York Stock Exchange and on Nasdaq. Trading volume slowed from last week’s pace.
Many analysts have been warning that the market was increasingly vulnerable to a pullback after soaring since mid-March, when investors began to anticipate a quick end to the conflict in Iraq. From March 11 to its peak last week, the Dow had shot up nearly 1,800 points, or 23.9%. The Nasdaq index rocketed 32% from March 11 to its peak last week.
Alfred Goldman, market analyst at brokerage A.G. Edwards Inc. in St. Louis, said he believes that a new bull market is underway, but that in the short term “we probably need a normal ‘correction’ that would be worthy of that title.”
A typical correction in a bull market would be expected to cut 5% to 10% from key indexes, measured from their latest highs. A drop of 10% in the Dow from its peak would pull the index down to 8,391. It last traded at that level April 28.
Stocks fell from the outset Monday as companies including hospital giant Tenet Healthcare Corp. and Goodyear Tire & Rubber Co. issued downbeat assessments of earnings in the current quarter. That followed a spate of profit warnings last week from some other well-known firms and raised fears that investors have been too optimistic about profit growth in the second half of the year.
Nervousness ahead of the meeting of Federal Reserve policymakers also weighed on the market, analysts said. The Fed begins a two-day meeting today and is expected Wednesday to cut its key short-term interest rate to help bolster the economy.
Until last week, many on Wall Street had been betting on a half-point cut in the Fed’s rate, which would reduce it from 1.25% to 0.75%.
But some Fed watchers late last week said the central bank may opt for a quarter-point cut instead, in part because some recent economic data have been more encouraging.
Uncertainty about the Fed’s next move has driven some investors to the sidelines in recent days, said John Bollinger, editor of the Capital Growth Letter in Manhattan Beach.
But he doesn’t foresee a steep sell-off in the near term. “I think the rally is pretty much intact,” Bollinger said. “As soon as we get the Fed announcement out of the way, I think stocks will probably firm up.”
Despite some high-profile earnings warnings over the last week, the number of companies projecting disappointing second-quarter results has been below the pace of the first quarter, according to earnings-tracker Thomson First Call in Boston.
What’s more, analysts continue to estimate a significant rebound in earnings in the second half, which would underpin stock prices if it happens.
Some market pros, however, aren’t impressed with the earnings recovery this year or the estimates for the second half, and argue that stocks have become overvalued after the run-up since mid-March.
“Clearly, there was no reason for the market to be above 9,000,” said Robert Nichols, chairman of Windward Capital Management in West L.A., which handles institutional and high-net-worth accounts. “It was strictly a momentum play.”
He called corporate earnings “miserable,” saying the 11.8% year-over-year operating profit growth for the S&P; 500 companies in the first quarter was achieved largely through layoffs and other cost-cutting moves, not from sustainable sales growth.
Nichols said the market may be running out of steam as portfolio managers who jumped in during May and early June run out of cash to put to work.
At a minimum, a continued pullback could test the idea that many investors have been sitting on the sidelines, waiting to buy if share prices were to decline.
Among Monday’s highlights:
* Treasury bond yields eased as stocks fell and as traders positioned their portfolios ahead of the Fed meeting. The 10-year T-note dipped to 3.31% from 3.36% on Friday. The yield surged last week on the heels of some upbeat economic data.
* European markets tumbled after brewer Heineken warned that 2003 earnings will fall short because of weak sales, and as consumer products giant Unilever also scaled back its growth estimate for this year. The Dutch market slid 3.5%, the German market lost 1.6% and the British market fell 1.7%.
* The euro sank with European markets, falling to $1.15, its lowest level since mid-May.
* Tenet’s profit warning sent its shares down $4.22 to $12.01 and hurt rivals including HCA, which lost $1.53 to $32.11, and Health Management Associates, which fell $1.01 to $18.09.
* Goodyear slumped 45 cents, or 6.8%, to $6.19 after saying earnings at its North American unit were down in May.
* Internet-related shares were hit by profit taking. Yahoo lost 62 cents to $31.52, Priceline.com slid $1.87 to $23.91 and Expedia fell $3.12 to $69.39.
Among other technology names, Sun Microsystems fell 37 cents to $4.80, Cisco Systems lost 69 cents to $17.24 and IBM was off $1.74 to $83.18.
* Some retail stocks bucked the downtrend. Gap rose 42 cents to $17.80 and Ross Stores rose 62 cents to $42.98.
Market Roundup, C10-11
