Stocks drop as Fed chief testifies
Stock prices retreated Wednesday as investors reacted uneasily to Federal Reserve Chairman Ben S. Bernanke’s comments on the economy and news that two Bear Stearns hedge funds were essentially worthless.
Even without any bad news, a downturn in stocks might have been expected after the rally that began last week. On Tuesday, the Dow Jones industrials touched the 14,000-point level for the first time.
Shares fell as Bernanke, speaking before a House panel as part of the central bank’s midyear forecast, predicted the economy would strengthen into 2008 and said inflation risks remained the Fed’s predominant concern. He also said the housing sector posed a risk to the economy and might get worse before it gets better.
Analysts detected a cautious tone in the Fed chief’s testimony but said it didn’t contain anything new. The remarks exacerbated investors’ concern over lackluster quarterly earnings reports and the news that the two Bear Stearns funds were left essentially worthless by bad bets on sub-prime loans.
“Bernanke didn’t really say a whole lot of things that were new, but he added to a combination of seemingly negative events,” said Todd Salamone, director of trading at Schaffer’s Investment Research Inc.
The Dow fell 53.33 points, or 0.4%, to 13,918.22. The blue-chip index was down as much as 134 points before a late-afternoon rebound.
The Standard & Poor’s 500 index fell 3.20 points, or 0.2%, to 1,546.17, while the Nasdaq composite index dropped 12.80 points, or 0.5%, to 2,699.49.
The Russell 2,000 index of smaller companies fell 3.98 points, or 0.5%, to 845.91.
Declining issues outpaced advancers 2-to-1 on the New York Stock Exchange.
Bond yields fell as fixed-income investors interpreted Bernanke’s comments on housing as meaning the Fed wouldn’t be raising short-term interest rates anytime soon. The yield on the 10-year Treasury note fell to 5.03% from 5.05% late Tuesday.
The dollar fell to record lows against the euro and the British pound. Gold prices advanced.
Oil prices rose after the Energy Department said gasoline stockpiles fell despite a bigger-than-expected rise in refinery operations. Crude futures climbed $1.03 to $75.05 on the New York Mercantile Exchange.
Bear Stearns late Tuesday said its hedge funds had been squeezed by wrong-way, highly leveraged bets on the direction of the mortgage market, which has been struggling with a spike in defaults among risky borrowers. Its shares dropped 57 cents to $139.34, though that was up from the $134.60 price it traded at after hours Tuesday.
JPMorgan Chase on Wednesday posted a 20% gain in earnings but Chief Executive Jamie Dimon said the firm was on guard for possible mortgage-related fallout. Its shares fell $1.04, or 2.1%, to $48.88.
Investors also sifted through the latest inflation reading. The Labor Department said its consumer price index rose 0.2% in June after a 0.7% jump in May.
Core inflation, which excludes often volatile energy and food costs, also rose a moderate 0.2% last month.
The tame readings on consumer prices could help ease some concerns about inflation, which remains among Wall Street’s chief concerns. Investors are hoping rising prices won’t prompt the Federal Reserve to put off an eventual interest rate reduction or even to raise rates. Even if the Fed doesn’t act, higher costs could prompt some consumers to curtail their spending. Such a retrenchment could dent corporate profits.
“Although there was really very little new information coming from Bernanke, it was still like the third out in a triple play when you combine it with poor earnings reports and the credit report from Bear Stearns,” said Doug Roberts, chief investment strategist for Channel Capital Research Institute.
In other market highlights:
* Intel shares fell $1.27, or 4.8%, to $25.06. The company late Tuesday reported weakness in its profit margins because of lower chip prices.
* Yahoo fell $1.33 to $26.20. The Web firm posted a 2% drop in second-quarter earnings and lowered its forecast for the year.
* Pulte Homes said late Tuesday it expected to post a hefty loss from continuing operations for the second quarter. Pulte shares fell 52 cents, or 2.3%, to $22.19.
* Altria Group fell 98 cents to $70.30 after reporting an 18% drop in earnings but higher revenue and an increase in profit from continuing operations.
* United Technologies fell $1.28 to $75.56 after it reported a 4% increase in its second-quarter earnings amid growth in the conglomerate’s commercial aerospace and construction businesses.
* Overseas, key stock indexes fell 1.1% in Japan, 1.3% in Britain, 1.8% in Germany and 1.7% in France.
