Inflation Worries Hit Wall Street
Wall Street on Wednesday suffered its worst one-day drop since April, as a potent mix of worries over the economy, inflation and corporate earnings drove more investors to the exits.
The Dow Jones industrial average tumbled 123.75 points, or 1.2%, to 10,317.36, bringing its three-day loss to 2.4% -- a troubling start to the fourth quarter, which usually is the market’s strongest period of the year.
Trading was heavy, and falling stocks outnumbered winners by more than 4 to 1 on the New York Stock Exchange, a lopsided ratio indicating widespread investor concern.
The U.S. market’s dive to three-month lows also pulled stocks down in Mexico, Canada and Brazil, among other recently highflying markets.
One trigger for the sell-off was a report showing that the services sector of the U.S. economy slowed sharply last month, while many services companies said they were facing rising costs because of high energy prices.
The report raised the specter of growing inflation pressures amid a weaker economy -- potentially a recipe for the “stagflation” that characterized the 1970s, a dismal decade for financial markets.
Most economists say it’s too early to fear a return of stagflation, but many agree that energy prices pose a big enough inflation risk that the Federal Reserve is certain to continue raising short-term interest rates.
Just a month ago, after Hurricane Katrina devastated the Gulf Coast and sent oil and natural gas prices soaring, the stock market rallied as some investors bet that the disruptions from the storms would compel the Fed to halt its rate-boosting campaign.
Now, because of the inflation threat, “There’s no end in sight for Fed tightening,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
What’s more, he says, investors increasingly are concerned that the Fed would be willing to engineer a marked economic slowdown to damp inflation.
“Given the choice between inflation or a slower economy, the Fed is going to pick the slower economy,” Ablin said.
That could have negative implications for corporate earnings growth, which has been robust for the last two years, underpinning the stock market.
“The risk of negative earnings surprises has grown, and that’s weighing on the market,” said John P. Waterman, chief investment officer at Rittenhouse Asset Management, an investment firm in Radnor, Pa.
As of early this week, Wall Street analysts still had high hopes for third-quarter earnings overall. Excluding energy companies -- whose profit is expected to be up significantly -- operating earnings for the blue-chip Standard & Poor’s 500 companies are projected to be up 11% from a year earlier.
That would be the ninth consecutive quarter of double-digit growth.
“The bar is high” for companies, Waterman said.
A number of big-name firms, including aluminum giant Alcoa, steelmaker U.S. Steel and household products company Clorox, have warned in recent weeks that their near-term earnings would suffer because of higher costs for oil, natural gas and other raw materials.
Still, there hasn’t been a huge wave of such warnings. And although growth in the services sector of the economy slowed last month, the manufacturing sector speeded up, according to a report Monday from the Institute for Supply Management, a business trade group.
Some analysts say the manufacturing report, and other relatively upbeat news on the economy in recent weeks, lulled stock investors into believing that the risks posed by record energy prices and rising interest rates were minimal.
The heavy selling in the market Tuesday, when the Dow slid 94.37 points, and again Wednesday suggested that investors no longer were willing to downplay those risks, said Art Hogan, market analyst at brokerage firm Jefferies & Co. in Boston.
“I think we’re seeing a delayed reaction” to those issues, he said.
Among the day’s market highlights:
* The Dow ended at its lowest close since July 7. Also ending at three-month lows were the S&P; 500, which dropped 18.08 points, or 1.5%, to 1,196.39, and the technology-heavy Nasdaq composite, which fell 36.34 points, or 1.7%, to 2,103.02.
* The selling was so widespread in the final hour of trading that 112 of 117 stock industry groups in the S&P; 500 declined for the day.
* Energy stocks were among the biggest losers, as oil prices continued to ease and as some investors opted to take profits from the stocks’ huge run-up this year. Valero Energy tumbled $6.75 to $105.77, Marathon Oil fell $3.79 to $61.07 and EOG Resources slid $3.56 to $71.42.
Crude oil futures in New York fell $1.11 to $62.79 a barrel, and are down 10% from their record high of $69.81 on Aug. 30. But natural gas prices continue to hover near all-time highs.
* Stocks of many industrial companies dropped on worries about the economy. General Motors fell $1.45 to $28.63, Caterpillar slid $1.56 to $56.22 and Phelps Dodge sank $6.17 to $128.33.
* Wall Street’s woes pulled the Mexican market down 1.3%, Canadian stocks down 1.9% and Brazilian shares down 3.6%.
* Treasury bond yields, which have surged in recent weeks on inflation fears, were little changed. The 10-year T-note ended at 4.35%, down from 4.37% on Tuesday.
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Down day
All major U.S. stock market indexes tumbled Wednesday amid worries over the economy and inflation.
*--* Index Wed. YTD Dow industrials --1.2% --4.3% S&P; 500 --1.5 --1.3 NYSE composite --1.6 +2.6 Nasdaq composite --1.7 --3.3 Bloomberg REITs --1.8 +2.8 Dow transports --2.0 --4.6 S&P; mid-cap --2.3 +5.0 S&P; small-cap --2.8 +2.9 Dow utilities --3.3 +24.0 NYSE energy --3.5 +27.7
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Source: Bloomberg News
