Stocks Fall in Rejection of Rosy View
The stock market signaled Tuesday that it wasn’t buying the Federal Reserve’s rosy view of the economy.
Share prices ended broadly lower for a second day, led by consumer-related issues including retailers and home builders, after the central bank raised its key short-term interest rate and indicated more credit-tightening to come.
The Dow Jones industrial average fell 76.11 points, or 0.7%, to 10,481.52, with all of the drop occurring after the Fed announced its rate move at about 11:15 a.m. Pacific time.
Fed policymakers, in their post-meeting statement, downplayed the effects of Hurricane Katrina and high energy prices as no more than transitory problems for the economy.
But some investors registered their concern about the economic outlook by selling shares of retailers such as Wal-Mart Stores, which slid 80 cents to a six-year low of $43.21.
Also, a Standard & Poor’s index of 15 major home builders’ shares dropped nearly 5% to its lowest level since May.
“I think there had been some hope the Fed would start easing off here” with rates, said Steven Goldman, market strategist at investment firm Weeden & Co. in Greenwich, Conn.
If there was an encouraging sign from Tuesday’s market action, it was that Treasury bond investors seemed to believe that the central bank was in fact getting close to the end of its rate-raising campaign.
Although yields, or rates, on shorter-term Treasury securities jumped after the Fed increased its key rate for the 11th time since mid-2004, longer-term bond yields were mostly flat. For example, the 10-year Treasury note, a benchmark for mortgage rates, ended at 4.24%, unchanged from Monday.
And the two-year T-note, which is particularly sensitive to Fed changes, ended at 3.98%, up from 3.92% on Monday but still surprisingly low given that the central bank’s bellwether rate -- the overnight loan rate among banks -- now is 3.75%.
“The Fed is almost done, in the bond market’s mind,” said Ethan Harris, economist at Lehman Bros. in New York.
He and many other analysts, however, believe that the Fed is more likely to continue raising rates into the early part of 2006 to fight inflation pressures, particularly from energy costs. Harris said he expected the Fed to stop at 4.5%, which would mean three more quarter-point rate increases.
From stock investors’ viewpoint, the problem with the bond market’s belief that the Fed will soon end its credit-tightening campaign is that it might take a sharp economic slowdown to come true. That could hammer corporate earnings and undercut share prices.
The Fed on Tuesday said the economy had momentum before Katrina hit, and policymakers indicated that they believed business activity would quickly recover.
But many consumer-related stock sectors have sunk in recent weeks on worries that high energy prices could mean a sustained slowdown in spending.
Those concerns were magnified Tuesday by a dismal weekly sales report from the International Council of Shopping Centers and by some corporate earnings warnings.
American Eagle Outfitters, a casual-apparel retailer, said profit this quarter would be below analysts’ estimates because of “lower-than-expected business trends.” Its shares slumped $3, or 12%, to $21.89.
Brunswick, which makes boats and other recreational products, tumbled $5.52 to $36.98 after lowering its 2005 earnings estimate. The company said it was turning cautious about sales because of sliding consumer confidence.
Home builders’ shares also dropped sharply Tuesday after the government said housing starts fell in August for a second straight month. KB Home lost $2.90 to $70.75, Ryland Group plunged $3.18 to $67.40, and Lennar was down $4.90 to $54.10.
In the broad market, losers outnumbered winners by 2 to 1 on the New York Stock Exchange and by 3 to 2 on Nasdaq, in active trading.
The Standard & Poor’s 500 index dropped 9.68 points, or 0.8%, to 1,221.34. The Nasdaq composite gave up 13.93 points, or 0.7%, to 2,131.33.
Still, most market indexes have held up relatively well after hitting multiyear highs early in August. The S&P; 500, for example, is down just 1.9% from its four-year high reached Aug. 3.
Stock market bulls say that’s a sign the Fed’s basic optimism about the economy is correct.
But many say Wall Street will have a hard time getting a meaningful rally underway until the Fed finally finishes with rates.
“The stock market doesn’t like rate increases. For any reason,” said Steve Todd, editor of the Todd Market Forecast newsletter in Crestline, Calif.
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Among Tuesday’s highlights:
* Casino stocks were clipped by a Merrill Lynch report that raised the possibility that room rates in Las Vegas were weakening. MGM Mirage dropped $1.69 to $42.05; Wynn Resorts lost $1.70 to $45.64.
* Steel stocks were led lower by U.S. Steel, which slid $2.44 to $42.81 after saying energy costs would hurt near-term profit.
* Many biotech stocks bucked the market downtrend as investors hunted for growth issues. Genentech rose $1.41 to $89.75 and Protein Design Labs added $1.05 to $28.98.
* Gold prices pulled back after hitting a 17-year high Monday. Near-term futures eased 50 cents to $466.20 an ounce.
