Major Market Indexes Slip After Fed Decision
Wall Street ended Tuesday close to where it began: still confident that the Federal Reserve is nearly done tightening credit.
Confidence in market darling Google, however, took a hit after the Internet giant reported weaker-than-expected earnings after regular trading ended.
Key market indexes were little changed for the day, but nearly all were positive for the month. Historically, a strong January has been a good sign for the market’s trend the rest of the year.
Treasury bond yields also barely budged Tuesday as the Fed met for the last time under Chairman Alan Greenspan and lifted its key short-term rate to 4.5% from 4.25%, as expected.
The Dow Jones industrial average eased 35.06 points, or 0.3%, to 10,864.86, after stumbling through the usual post-Fed-meeting volatility in the final two hours of trading.
The Standard & Poor’s 500 index slipped 5.12 points, or 0.4%, to 1,280.08 and the technology-heavy Nasdaq composite edged down 0.96 of a point to 2,305.82.
But rising stocks outnumbered losers by modest margins on the New York Stock Exchange and on Nasdaq, and the NYSE composite index and several indexes of smaller stocks inched up to record highs.
For the month, the Dow was up 1.4%, the S&P; 500 gained 2.6% and the Nasdaq index rose 4.6%.
Smaller-stock indexes roared ahead in January, leading the market as they have for most of the last six years. The Russell 2,000 small-company index closed at a record high Tuesday, up 0.3% for the day and 8.9% for the month.
The market’s strength in January reflected investors’ confidence that the economy would continue to expand in 2006, many analysts say. And that confidence stemmed in part from faith that the Fed is almost finished raising short-term rates.
Indeed, stocks soared Jan. 3, the year’s first trading session, after the Fed that day released the minutes of its Dec. 13 meeting and indicated that the number of additional rate increases “probably would not be large.”
On Tuesday, the Fed said in its post-meeting statement that “some further policy firming may be needed” to restrain inflation.
Anthony Karydakis, economist at J.P. Morgan Asset Management in New York, said there was “at least one, and maybe two more rate increases” of a quarter-point in the pipeline, depending on how the economy fared in coming months.
That matches what many on Wall Street have been expecting -- which is why the market showed little reaction Tuesday, analysts said.
Assuming the Fed is almost finished, stocks have “pretty good support” from the economic fundamentals, said Leo Grohowski, chief investment officer at U.S. Trust Co. in New York.
He expects the economy to grow at a real rate of about 3% this year, down from 3.5% growth in 2005. The slower pace still should allow blue-chip companies’ earnings to rise on average about 10% this year, Grohowski said.
Although he said the market was likely to be more volatile this year than last, Grohowski estimated that the S&P; 500 index could end the year around 1,400, which would be a gain of about 9% from Tuesday’s closing level.
Historically, the trend in the S&P; 500 in January has foreshadowed the full-year change in 45 of the last 56 years, an 80% accuracy rate, according to the Stock Trader’s Almanac.
Richard Weiss, chief investment officer at City National Bank in Los Angeles, said he was optimistic about the market overall, but was betting that investors would become more risk-averse if the economy slowed. That should translate into blue-chip stocks taking the lead from smaller issues, he said.
Any rise in investor caution also could hurt emerging markets overseas, Weiss said. “We’re taking profits there,” he said.
Many emerging markets rocketed in January, building on huge gains in recent years. Brazil’s main stock index rose 0.4% to a record 38,382 on Tuesday, and was up 14.7% in January after soaring 28% last year.
As for the bond market, the fact that longer-term Treasury bond yields have declined since mid-November while shorter-term yields have risen is another sign that investors believe the Fed is near the end of its rate-raising campaign, analysts say.
The 10-year Treasury note yield ended Tuesday at 4.52%, down from 4.53% on Monday. The two-year T-note also ended at 4.52%, up from 4.51%.
With the Fed’s key rate at 4.5%, the so-called yield curve is said to be flat. That often happens when investors believe the Fed is nearly done raising short-term rates, and that the next big move may be down.
David Ader, government bond strategist at RBS Greenwich Capital Markets in Greenwich, Conn., said he expected the Fed to raise its rate one more time, to 4.75%, under new Chairman Ben S. Bernanke, and then stop.
If the Fed doesn’t halt there, however, many stock and bond market bulls concede they may have to reconsider their optimistic outlooks.
Among Tuesday’s market highlights:
* Google may have set a poor tone for today’s trading in tech shares after it reported lower-than-expected quarterly profit. Its stock dived to $379 after hours from a close of $432.66, up $5.84, in regular trading.
* Near-term crude oil futures in New York eased 43 cents to $67.92 a barrel after the Organization of the Petroleum Exporting Countries pledged to keep output steady.
* Gold futures reached a fresh 25-year high, up $5 to $570.80 an ounce in New York. Among gold mining stocks, Barrick Gold jumped $1.15 to $31.46 and Agnico Eagle rose 99 cents to $24.52.
Many other commodity-related stocks also continued their recent rally. Nickel miner Inco rose $1.25 to $51.28; aluminum producer Alcan surged $2.17 to $48.79.
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A strong start
How key stock market indexes rose in January, compared with their percentage changes for all of 2005.
Pctng change
*--* Index 2005 Jan. NYSE energy +27.4% +13.5% SOX chip stocks +10.7 +12.4 Russell 2,000 +3.3 +8.9 S&P; small-cap +6.6 +8.3 S&P; mid-cap +11.3 +5.8 NYSE compos. +7.0 +4.6 Nasdaq compos. +1.4 +4.6 Dow transports +10.5 +4.1 S&P; 500 +3.0 +2.6 Dow industrials -0.6 +1.4
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Source: Bloomberg News
