Stocks Tumble in Wake of Economic Reports
Stock prices moved sharply lower Wednesday after a series of economic reports left investors questioning whether the Federal Reserve might resume this month its string of interest rate hikes.
A Labor Department report that wages rose at an annual rate of 4.9% in the second quarter, above the 4.2% the agency had estimated, was an unpleasant surprise for a market that had reached three-month highs on hopes of stable rates. For the first quarter, the department said labor costs jumped 9% -- the largest quarterly rise in almost six years.
The market also found little solace in a report from the Institute for Supply Management that showed the service sector grew at a faster pace in August than economists had forecast. An economy still showing this type of growth could make it easier for the Fed to justify a rate hike to fight inflation. The central bank left rates unchanged at its last meeting after a string of 17 straight increases; its next meeting is Sept. 20.
Stocks drifted even lower Wednesday afternoon after the Fed’s “beige book” was released. The survey of regional economies found that although economic growth continued in the fall, five of the Fed’s 12 districts showed deceleration. The findings that the housing market slowed could also bolster the arguments of some that the economy could eventually suffer if consumer spending cools as a result.
One of the market’s greatest fears is that although the economy might continue to slow, the Fed could resume rate hikes to forestall inflation, threatening a further economic slowing.
The Dow Jones industrial average fell 63.08 points, or 0.6%, to 11,406.20.
The tech-heavy Nasdaq composite index and the Standard & Poor’s 500 index showed steeper declines. The Nasdaq dropped 37.86 points, or 1.7%, to 2,167.84, in part as Intel declined after a widely expected announcement of job cuts.
The S&P; 500 was down 12.99 points, or 1%, at 1,300.26, while the Russell 2000 index of smaller companies fell 15.46, or 2.1%, to 712.04.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange.
“I think people are still looking over their shoulders in terms of labor costs,” said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.
Brorson said that he would be cautious about jumping into stocks after the gains seen this summer and that he was surprised the market hadn’t ceded more ground.
“You’ve got a situation where the Fed is trying to fine-tune this economy,” he said. “There’s no guarantee they’re going to get it right.”
Bond yields rose for a second straight day, with traders betting that the economic data raised the likelihood of a resumption in the Fed’s interest-rate increases.
“It warns us that more Fed rate hikes can’t be dismissed,” said John Lonski, chief economist at Moody’s Investors Service in New York.
The yield on the benchmark 10-year Treasury note rose to 4.80%, up from 4.78% on Tuesday.
The declines in stocks under the weight of economic news came despite recent lows in the price of oil. Crude futures, which recently were above $70 a barrel, have fallen amid an easing of tensions over Iran’s nuclear program, an end to the summer driving season, and news that one Gulf of Mexico platform was producing 20% more than before it was struck by Hurricane Katrina. Crude prices fell $1.10 on Wednesday to $67.50 a barrel on the New York Mercantile Exchange.
The decline hurt oil stocks Wednesday. Exxon Mobil tumbled $1.30, or 1.9%, to $67.18.
The stocks of refiners Sunoco and Valero Energy retreated after Citigroup Investment Research downgraded their shares to “hold” from “buy,” citing weakening profit margins. Sunoco fell $3.98 to $67.24, while Valero slid $2.73 to $53.02.
In other market highlights:
Intel fell 68 cents, or 3.4%, to $19.31 for the steepest drop in the Dow average. The company said late Tuesday that it planned to eliminate 10,500 jobs. The slide pushed down semiconductor shares 3.3% for the top decline among 24 sectors in the S&P; 500.
* Hewlett-Packard tumbled 62 cents to $35.84. The world’s second-largest personal computer maker is being probed by California Atty. Gen. Bill Lockyer after company investigators disguised their identity while trying to determine which directors leaked confidential information to the media.
* General Motors rose 73 cents, or 2.4%, to $31.17 for the biggest gain in the Dow average. The world’s largest automaker is extending warranties to 100,000 miles on 2007 cars and trucks to win buyers lost to Toyota Motor and other competitors.
Ford Motor added 16 cents to $8.55. The company on Tuesday named Boeing executive Alan Mulally to replace Chief Executive William Clay Ford Jr. Citigroup raised the shares to “hold” from “sell.” Boeing fell 92 cents to $74.44.
* XM Satellite Radio Holdings, the largest pay-radio company, lost 47 cents to $12.32. The company said Tuesday that the Securities and Exchange Commission was investigating its reporting of subscriber targets and costs incurred to attract customers.
* Priceline.com fell $3.29 to $30.87, the stock’s biggest drop in more than a year. The online travel agency said its top two investors sold 8.9 million shares, or 70% of their holdings.
