Stocks Slide on Hint of Rate Hike
Wall Street tumbled Tuesday after Federal Reserve Chairman Alan Greenspan hinted that higher interest rates are only a matter of time. The Dow Jones industrial average lost more than 120 points.
The sell-off in the final hour of trading erased earlier gains on solid earnings reports from Dow components General Motors, Pfizer and Altria Group.
The Dow shed 123.35 points, or 1.2%, to 10,314.50. The Nasdaq composite index sagged 41.80 points, or 2.1%, to 1,978.63. The Standard & Poor’s 500 index declined 17.67 points, or 1.6%, to 1,118.15.
“It’s a foregone conclusion that interest rates will move higher,” said Kevin Caron, a market strategist at Ryan, Beck & Co. “I wouldn’t be at all surprised if they do begin to raise rates, and you see a burst of economic activity as folks go out and buy that new car or buy a home before rates go up higher.”
The price of U.S. Treasuries fell sharply. The yield, which moves in the opposite direction to price, on the benchmark 10-year note hit 4.46%, a high-water mark for the year. Oil prices rose slightly to $37.60 a barrel.
The dollar hit a five-month high against the euro after Greenspan told the Senate Banking Committee that the nation’s banking system was well-prepared to deal with rising rates. The market took that as a signal that the Fed would tighten its policy sooner rather than later.
The Fed chairman didn’t directly discuss interest rate policy in his remarks to the committee but was expected to do so today before the Joint Economic Committee.
Although hardly a surprise, Greenspan’s suggestion that banks could weather a rise in rates gave added weight to speculation that the Fed will move rates higher by the end of summer.
With so much advance warning, the rate hike itself is not expected to have much of a negative effect. Until rates do go up, however, the markets are likely to remain volatile as large investors react to each new piece of economic information.
For long-term investors, the good news is that higher rates are a sign that the recovery is solid.
“I think there’s more risk being out of the market than in the market right now,” said Michael Murphy, head trader at Wachovia Securities in Baltimore. “The economy is showing us the expansion is for real, and that will push investors back into the market. In the meantime, we’ll have days like this. The people who are really nervous more than likely are short-term players.”
Providing further evidence that the economy is improving, most companies have reported first-quarter earnings that have met or exceeded Wall Street’s expectations. Analysts surveyed by Thomson First Call forecast an average 17% rise in profit for the S&P; 500.
General Motors rose $1.62 to $47.77, beating forecasts with strong results at its financing arm and improved business in Asia. Its automotive operations in North America and Europe, however, continued to be hampered by intense pricing pressure.
Pfizer shares slumped 88 cents to $36.70 after reporting a 50% drop in net income on charges related to its acquisition of Pharmacia last year. But the results still beat analysts’ expectations, and revenue jumped 47%.
Altria, the parent company of Philip Morris and Kraft Foods, fell 12 cents to $56.33 after reporting a slight rise in first-quarter profit on the strength of its tobacco business.
Kraft Foods lost 12 cents to $31.27 after reporting that first-quarter profit tumbled 34% amid continuing restructuring costs at the nation’s largest food company. Excluding the charges, the company would have beaten expectations.
Industrial manufacturer Ingersoll-Rand was down $1.19 at $70.81 after beating Wall Street expectations with a 17% increase in first-quarter profit as nearly all its businesses posted double-digit revenue increases.
Energy stocks also slumped. ChevronTexaco fell $1.85 to $90.02 and ConocoPhillips dropped $2.02 to $71.03.
Shares of those companies may be falling out of concern growth in China will slow at the same time that the U.S. economy cools off.
In the tech sector, Cisco Systems, the world’s largest maker of equipment to link computers, shed 75 cents to $22.11. Dell fell 85 cents to $34.88 and Intel lost 61 cents to $26.07.
Telephone stocks were the only one of the S&P; 500’s 10 industry index groups to advance, after No. 3 U.S. long-distance carrier Sprint reported quarterly sales that topped analysts’ estimates. Sprint rose 27 cents to $19.25.
Declining issues outnumbered advancers about 3 to 1 on the New York Stock Exchange, with volume at a moderate 1.96 billion shares.
Market Roundup, C7
