Oil-Price Surge, GM Hit Stocks
Stocks ended broadly lower Wednesday, tripped by record high oil prices and by General Motors’ financial woes.
The threat of a cut in GM’s credit rating to below-investment-grade status also caused some jittery investors to dump corporate bonds in general.
On Wall Street, the Dow Jones industrial average slid 112.03 points, or 1%, to 10,633.07, the blue-chip index’s biggest one-day loss since Feb. 22.
But the damage to the market overall was modest considering oil’s surge above $56 a barrel and the 14% plunge in GM’s share price, some analysts said. Most major stock gauges fell less than the Dow, which counts GM among its 30 member shares.
Oil and GM are making more investors nervous, but the U.S. economy still appears to have strong momentum, which in turn should support corporate profit growth, said Marc Pado, U.S. market strategist for New York-based brokerage firm Cantor Fitzgerald.
“The economic news has been pretty good,” Pado said. That makes it unlikely that many investors would suddenly decide to bail out of stocks, he said.
The Federal Reserve said Wednesday that the nation’s manufacturing sector was operating at 78.5% of capacity in February, the highest level since November 2000. A separate report showed that housing starts in February rose to a 21-year high.
Oil, which jumped $1.41 to a record $56.46 a barrel in New York futures trading Wednesday, has rocketed from $42 at the start of the year on supply concerns. But there have been few signs that higher energy costs are crimping consumer or business spending overall.
The government reported Tuesday that consumer spending rose 0.5% in February. That was slightly below expectations, but January spending was revised to a 0.3% increase from a 0.3% decline.
The Dow has declined 2.8% since reaching a 3 1/2 -year closing high of 10,940 on March 4. The Standard & Poor’s 500 index, which lost 9.68 points, or 0.8%, to 1,188.07 on Wednesday, is down 3% since reaching its own 3 1/2 -year high March 7.
Compared with blue-chip indexes, the technology-dominated Nasdaq composite index has struggled this year. It lost 19.23 points, or 0.9%, to 2,015.75 on Wednesday and has fallen 7.5% since reaching a multi-year high Dec. 30.
Mark Donahoe, a veteran trader at brokerage Piper Jaffray in Minneapolis, said many investors appeared to be willing “to just sit on their hands” for the time being. Although falling stocks outnumbered winners by more than 2 to 1 on Wednesday, Donahoe described the session as showing “zero panic” even though oil topped its previous price peak set in October.
Pado said a pullback in energy stocks this month suggested that Wall Street doubted that oil prices would rise much more. Exxon Mobil shares fell 6 cents Wednesday to $60.29 and are down 5.2% since March 4.
But other analysts are more concerned about the trend in energy costs and the potential effect on the economy.
“We’re getting into uncharted territory on oil prices,” said Jason Trennert, market strategist at ISI Group in New York. “Our best guess is this will slow the economy,” threatening corporate earnings as well, he said.
GM’s profit warning also raised some red flags Wednesday, with its stockholders as well as with its bondholders. The stock tumbled $4.71 to $29.01, a 10-year low. And the prices of its bonds also sank, driving their yields up. (Bond yields move in the opposite direction of prices.)
GM’s bonds maturing in 2033 and paying 8.38% interest slid to $89.75 per $100 face value, from $97.82 on Tuesday, according to Bloomberg News data.
Credit rating firm Fitch Ratings cut GM’s grade to one notch above junk, or speculative, levels. Standard & Poor’s changed its outlook on GM to “negative” from “stable,” raising the risk of a downgrade. Moody’s Investors Service also warned of a possible downgrade.
Concern about GM’s financial health triggered selling of other corporate bonds, including those already in the junk category. The yield on an index of 100 junk bonds tracked by KDP Investment Advisors jumped to a six-week high of 6.74% from 6.67% on Tuesday.
As investors sold corporate bonds, some bought Treasury issues in a classic “flight to quality.” The 10-year T-note yield fell to 4.51% from 4.55%.
Among the day’s highlights:
* Steel and other commodity-related stocks were mostly lower, continuing a pullback after their recent surge. Mittal Steel lost $2.95 to $36.26 and Nova Chemicals slid $2.20 to $45.72.
* GM hurt other auto- and truck-related stocks. Ford fell 32 cents to $11.91, diesel engine maker Cummins dropped $1.83 to $73.99 and auto parts maker Magna International lost $1.61 to $71.22.
* Westlake Village-based retailer Guitar Center dropped $5.65 to $54.10 after the company canceled a meeting with investors, fueling speculation that it may be planning an acquisition, according to Bloomberg News.
