Stocks slide despite cut
A still-anxious Wall Street closed lower Wednesday after spiking higher in reaction to the Federal Reserve’s half-point rate cut.
After nearly three sessions of big gains that sent the Dow Jones industrials surging more than 470 points this week, some investors opted to collect profits late in Wednesday’s session rather than leave money on the table during continuing uncertainty about the economy.
Expectations of more downgrades of bond insurers contributed to the late retreat, as did uneasiness about a Commerce Department report due today on personal income and spending.
Key reports on the job market and manufacturing due Friday also could add to investors’ concerns about the economy, which has been dragged down by a crumbling housing market and mortgage-related losses at major financial institutions.
The Dow, which had been up more than 200 points after the central bank’s decision, closed down 37.47 points, or 0.3%, at 12,442.83.
Broader stock indicators also finished lower. The Standard & Poor’s 500 index slid 6.49 points, or 0.5%, to 1,355.81, and the Nasdaq composite index fell 9.06 points, or 0.4%, to 2,349.00.
The Russell 2,000 index of smaller companies fell 9.71 points, or 1.4%, to 695.49.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange.
Overseas markets closed lower before the Fed rate cut. Key stock indexes fell 1% in Japan, 0.8% in Britain, 1.4% in France and 0.3% in Germany.
Government bond yields fell as stocks pulled back. The yield on the benchmark 10-year Treasury note fell to 3.64% from 3.67% late Tuesday.
The dollar fell, marking a record close against the euro. The European currency ended New York trading at $1.49, up from $1.478 late Tuesday.
Gold prices fell, and oil futures rose 69 cents in New York to $92.33 a barrel.
The Federal Reserve lowered its benchmark rate to 3%, the lowest level since spring 2005. The move followed an emergency rate cut last week of three-quarters of a percentage point and came as fresh data indicated that the economy slowed significantly in the final three months of 2007. The country’s gross domestic product expanded at a weak annual rate of 0.6% in the fourth quarter, less than half what had been expected. For all of 2007, the economy grew 2.2% from the year before, the weakest growth since 2002.
Wednesday’s move was the fifth cut made by the Fed -- amounting to a cumulative 2.25-point reduction -- since the central bank began making reductions in September amid turmoil in the credit and stock markets.
Worries about the health of bond insurers played a part in Wednesday’s decline. Meredith Whitney, an Oppenheimer & Co. analyst, wrote in a research note before the market opened that rating firms were likely to downgrade already-pummeled insurers.
In addition, closely held Financial Guaranty Insurance Co., the fourth-largest bond insurer, had its credit rating cut to AA from AAA by Fitch Ratings after failing to meet a deadline to raise capital.
No. 1 bond insurer MBIA slumped $2.02, or 13%, to $13.96. The second-largest, Ambac Financial Group, tumbled $2.08, or 16%, to $10.85.
Oppenheimer’s Whitney said the expected downgrades could lead banks to write down their portfolios of mortgage-related debt by an additional $70 billion, including $10 billion at Merrill Lynch, whose rating she cut to “underperform” from “perform.”
But Merrill chief John Thain said Wednesday that the firm’s potential losses from bond insurers totaled no more than $3.5 billion.
Merrill, Citigroup, JPMorgan Chase and Morgan Stanley all erased rallies Wednesday of more than 3% after the Fitch downgrade.
Merrill finished down $1.38, or 2.4%, at $56.09. Citigroup fell 3 cents to $27.88, JPMorgan dropped 10 cents to $47.35 and Morgan Stanley slipped 83 cents to $48.63.
Two pieces of news released after the market’s close Wednesday could have opposite effects today on shares of bond insurers and financial stocks in general. S&P; said it lowered or might cut ratings on $534 billion of residential mortgage securities and collateralized debt obligations.
On a positive note, MBIA said Warburg Pincus stuck to its agreement last month to buy $500 million of MBIA stock for $31 a share even though it was now trading under $14. Warburg also committed to “backstop” a private placement of MBIA securities for another $500 million.
In other market highlights:
* Centex fell $2.60 to $26.40. The No. 2 U.S. home builder posted a much wider loss than expected after a slump in demand dragged down property values.
* Boeing climbed $1.91, or 2.4%, to $82.87 for the top gain in the Dow average after the company raised its annual profit forecast.