Inflation Fears, Oil Prices Depress Stocks
Volatile oil prices and inflation fears drove stocks down Wednesday while also vaulting benchmark U.S. Treasury yields to an eight-month high.
A gradual acceleration of inflation, a rally in commodities and an expected slowdown in corporate profits have made investors increasingly nervous about stocks. Those anxieties escalated Wednesday, as the feeble dollar and bearish bond market combined with a rise in gold and oil prices to create a storm of selling.
“Profit margins have peaked, inflation is on the way up, and those aren’t generally good things for stocks,” said John Caldwell, chief investment strategist for McDonald Financial Group. “So weakness in the bond market on top of that tends to make people skittish.... It just makes people question their thinking that much more.”
The Dow closed down 107 points, or 1%, at 10,805.62, diminishing hopes that the index would soon break the 11,000 mark for the first time in nearly four years.
The broader gauges also sagged. The Standard & Poor’s 500 index declined 12.42 points, or 1%, to 1,207.01. The Nasdaq fell 12.26 points, or 0.6%, to 2,061.29.
Decliners outnumbered advancing issues by more than 3 to 1 on the New York Stock Exchange.
Oil futures settled up 18 cents at $54.77 a barrel in New York trading after weekly government data showed a larger-than-expected rise in domestic crude inventories but declines in supplies of gasoline and distillate fuel, which includes heating oil.
Energy stocks finished sharply lower, with the XOI oil index dropping 2.62%. Exxon Mobil was the worst performer on the Dow, tumbling $2.31 to $60.79. ChevronTexaco subtracted $1.74 to $59.76, and ConocoPhillips lost $3.01 to $106.60.
It was also a challenging day on the bond market, as the yield on the 10-year Treasury note rose to its highest level since July, to 4.52%, up from 4.39% on Tuesday.
Bond yields and prices move in opposite directions. Yields rise as their prices fall. The sell-off in Treasuries was triggered by the Federal Reserve’s release of its latest survey of business conditions, known as the beige book. The report said the economy was strong but suggested that inflation might be starting to rise. Some saw this as a hint that the Fed might take a more aggressive posture on raising short-term rates at its March 22 meeting.
Bond traders had already moved to bearish positions as the Treasury auctioned $15 billion in five-year notes Wednesday, and prepared to sell $9 billion in 10-year notes today. Some of the nervousness was related to a continuing debate about foreign buyers’ appetite for U.S. debt, especially in the face of a weaker dollar. Further widening the currency gap, a sharp rise in industrial production in Germany and good economic news out of Japan contributed to the strength of the euro and the yen.
“I think the bond market is going through a reality check,” said Michael Strauss, chief economist at Commonfund. “The bottom line is that the economy looks healthier, it looks like it’s absorbed some hiccups ... but inflation is coming. And more importantly, the Fed recognizes this.”
In other market highlights:
* The move on the 10-year note pressured interest-rate-sensitive sectors, including stocks of banks and mortgage lenders. Washington Mutual, the biggest U.S. savings and loan, lost 89 cents to $41.29. Citigroup dropped 59 cents to $47.88.
Countrywide Financial of Pasadena slid $1.69 to $33.36 after a Jefferies & Co. analyst cut her rating on the biggest U.S. mortgage lender to “hold” from “buy,” citing the prospect for higher borrowing costs. IndyMac Bancorp, the Pasadena-based thrift and mortgage banker, tumbled $1.47 to $35.72.
* Home builders fell on fear that higher mortgage rates might crimp demand for homes. Los Angeles-based KB Home dropped $4.16 to $116.74. D.R. Horton slid $2.05 to $41.50, and Pulte Homes fell $2.54 to $75.45.
* McGraw-Hill, which owns Standard & Poor’s and Business Week magazine, lost $6.54 to $89.31. Its 6.8% drop was the biggest in the S&P; 500. The company said recent acquisitions including J.D. Power & Associates would reduce 2005 earnings by as much as 7 cents a share.
* Kmart Holding gained $2.42 to $111.66 after the retailer posted a $309-million profit for the fourth quarter, a 14% increase. Kmart is expected to close its acquisition of Sears, Roebuck in the coming weeks.
