Stocks fall on Fed’s limited move
The staying power of the stock market’s bulls is about to be tested yet again.
Wall Street on Tuesday suffered its worst plunge in more than a month after the Federal Reserve cut short-term interest rates less than many investors had anticipated.
That raised fears that the 2-week-old recovery in share prices may fizzle, just as investors were hoping for a strong finish to a volatile year.
The Dow Jones industrial average sank 294.26 points, or 2.1%, to 13,432.77 -- taking back about 30% of its rebound since Nov. 27.
Some broader market indexes gave back more of their recent winnings. The Russell 2,000 small-stock index slumped 24.93 points, or 3.2%, to 766.27. That was 44% of what it had gained since Nov. 27.
Losers swamped winners by more than 5 to 1 on the New York Stock Exchange.
Whipsaw-like moves have become increasingly common in the last four months, underscoring investor anxiety over the economic fallout from the housing market’s plunge.
“To see the market sell off this quickly just shows how vulnerable and tentative these gains have been,” said Alan Gayle, senior investment strategist at Trusco Capital Management in Richmond, Va.
Investors dumped stocks after the Fed cut its two key interest rates by a quarter-point each. Although some analysts had expected a quarter-point drop in the Fed’s benchmark rate -- the federal funds rate -- many were counting on a deeper cut in the discount rate, which is what banks pay to borrow directly from the Fed.
The argument for a larger reduction in the discount rate was that many banks hit by mortgage-related losses have been cut off by other lenders and need access to cheaper money from the central bank.
Banks are facing “a crisis of confidence,” said Robert Bissell, head of Wells Capital Management in Los Angeles. Like many on Wall Street, he said he was perplexed by the Fed’s reluctance to provide lower-cost funding to the banking system.
Not surprisingly, financial and housing stocks led the market sell-off. Merrill Lynch sank $3.59, or 5.8%, to $58.61, Countrywide Financial slid $1.18, or 9.4%, to $11.33 and KB Home dropped $2.77, or 11.3%, to $21.68.
Many battered financial issues had paced the market’s rebound of the last two weeks, thanks in part to comments by top Fed officials indicating that the central bank wouldn’t allow the financial system to unravel.
In its statement Tuesday, the Fed kept the door open for additional rate cuts. And late in the day some Fed officials were privately hinting to the media that they might take additional steps soon, such as by slashing the discount rate further.
But some analysts said the market’s verdict was that the Fed was falling behind in its efforts to buttress the economy.
“The concern is that they’re not doing enough now, which will force them to do more later,” said John Canavan, a fixed-income analyst at Stone & McCarthy Research in Skillman, N.J.
As in November, some investors fled stocks for Treasury securities, the classic haven in times of market stress. The 10-year T-note yield sank to 3.97%, down from 4.15% on Monday. The two-year T-note dived to 2.92% from 3.17%.
Still, some stock market bulls said share prices were due to give back some of their gains after the robust rally of the last two weeks, and that the market could quickly rebound again.
Stanley Nabi, strategist at New York-based Silvercrest Asset Management, noted that employment levels in the economy have been holding up, which he said underpinned optimism that the housing market’s troubles won’t sink the broader economy.
“A good deal of [Tuesday’s] loss can be recovered in the next few days,” he said.
Some analysts said market indexes could pull back to near the lows they reached on Nov. 26. If they can hold above those levels it would be a positive sign, said Marc Pado, U.S. market strategist at Cantor Fitzgerald.
“We’re going back down,” he said. “You normally don’t go straight up from a low without putting in a test, and this is it.”
Among the day’s market highlights:
* The Standard & Poor’s 500 index dropped 38.31 points, or 2.5%, to 1,477.65. The Nasdaq composite lost 66.60 points, or 2.4%, to 2,652.35.
* Among financial issues, bond insurer Ambac Financial slid $2.43 to $26.99, credit card giant Capital One fell $2.14 to $49.93 and mutual fund manager Franklin Resources was off $6.54 to $114.96.
* In the 30-stock Dow, 28 issues fell. The two gainers: McDonald’s, which added $1.23 to a record $63.13 on reports of strong November sales; and AT&T;, up $1.56 to $39.46 after boosting its dividend nearly 13%.
* Fear of recession hammered some industrial issues, including General Motors, down $1.49 to $27.51; Caterpillar, off $2.86 to $73.72; and Whirlpool, down $5.30 to $83.24.
* Energy stocks were mostly lower even as crude oil prices rebounded, gaining $2.16 to $90.02 a barrel.
* The Fed’s limited rate cut helped support the dollar. The euro eased to $1.468 from $1.471 on Monday.
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walter.hamilton@latimes.com
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Go Figure
294.26 points: Amount the Dow Jones industrial average dropped after the Federal Reserve said it was cutting its key interest rate a quarter-point. Pages C1, C6
$600 million: Amount TV networks could lose collectively if the writers strike continues into summer, according to one estimate. Page C1
