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Stocks fall as traders await Fed's take on economy
Source: Agencies |
August 12, 2009, Wednesday
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A RECURRENCE of investors' anxiety about the U.S. economy gave Wall Street its biggest loss in five weeks.
The major indexes fell 1 percent yesterday as investors worried that the market's steep gains in the past month could unravel if the economy doesn't show more signs of strengthening. Warnings about the health of banks and uneasiness ahead of the Federal Reserve's economic statement Wednesday led investors to dump financial stocks and wade into defensive areas like consumer staples companies and government debt.
Meanwhile, a record 10th straight monthly drop in wholesale inventories brought a fresh reminder that a recovery in the economy is likely to be gradual.
But many analysts said investors weren't panicking yesterday. They were taking a much-needed pause following a rally that seemed to be going at breakneck speed. The Standard & Poor's 500 index had reached at its highest level since last fall, rising 15 percent in just four weeks and 49 percent from a 12-year low in early March.
"This sort of give-and-take is quite healthy," said Erik Davidson, managing director of investments at Wells Fargo Bank in Carmel, California. "You're up 50 percent in five months. That's 10 percent a month. In quote-unquote normal markets that's five years worth of returns."
Moreover, traders often become jittery when the Fed policymakers meet to discuss interest rates. It is widely expected that the central bank will hold interest rates at their historic low of essentially zero, but investors are waiting to see what the Fed has to say about the economy when the meeting concludes Wednesday.
"It's pretty clear that a lot of people are pulling back any bets pending what is going to happen with the Fed," said Max Bublitz, chief strategist at SCM Advisors in San Francisco.
There were some troubling developments during the day, however. Downbeat comments from analysts about banks weighed on the market. Analyst Richard Bove of Rochdale Securities predicted that bank earnings won't improve for the second half of the year and that many companies will post losses.
"It just takes the euphoria feelings off the table," said Dave Rovelli, managing director of trading at brokerage Canaccord Adams, referring to Bove's comments and recent optimism among investors.
With many traders on vacation, volume was light, which tends to skew price moves.
The Dow Jones industrial average fell 96.50, or 1 percent, to 9,241.45. It had been down as much as 121 points. It was the biggest drop since July 7, when the index lost 161 points. The Dow slipped 32 points Monday.
The broader S&P 500 index also had its worst day since July 7, falling 12.75, or 1.3 percent, to 994.35.
The Nasdaq composite index fell 22.51, or 1.1 percent, to 1,969.73, while the Russell 2000 index of smaller companies fell 9.75, or 1.7 percent, to 562.12.
About three stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion traded Monday.
The Chicago Board Options Exchange's Volatility Index spiked in a sign of investors' nervousness. The VIX, also known as the market's fear index, rose 4.1 percent to 26.01, its highest level in a month. It is down 35 percent in 2009 and its historical average is 18-20. It reached a record 89.5 in October at the height of the financial crisis.
Bond prices jumped as stocks retreated. The gains followed a solid showing at the first of the week's three auctions for a record US$75 billion in debt. Prices often fall when the government introduces supply to the market. The sale yesterday was for US$37 billion in three-year notes and the government will auction US$23 billion in 10-year notes today.
Investors watching for a drop in buyers because that could force the government to increase the interest it pays, which would drive up borrowing costs for consumers and slow an economic recovery.
The yield on the three-year note, which moves opposite its price, fell to 1.72 percent from 1.78 percent late Monday. The yield on the benchmark 10-year Treasury note fell to 3.67 percent from 3.78 percent.
Among banks, Citigroup Inc. fell 25 cents, or 6.4 percent, to US$3.69. Wells Fargo & Co. slid US$1.75, or 6.1 percent, to US$26.89.
The KBW Bank Index, which tracks 24 of the largest U.S. banks, fell 4.4 percent.
Analyst downgrades made traders cautious about the overall economy.
Bond insurer MBIA Inc. tumbled 78 cents, or 12.6 percent, to US$5.39 after J.P. Morgan Securities cut its rating on the stock over concerns the company could face steep losses from bad debt.
Yum Brands Inc. fell after an analyst at UBS lowered his rating on the company because of concerns about sales. The parent of the Pizza Hut, Taco Bell and KFC fast-food chains fell US$1.40, or 3.8 percent, to US$35.13.
The day's economic readings were mixed. The Commerce Department said businesses cut inventories at the wholesale level for a record 10th consecutive month in June. The drop has contributed to the recession. In one bright spot, sales rose 0.4 percent for a second straight month, the first back-to-back increases in a year.
The Labor Department said productivity - which measures the amount of output per hour of work - grew 6.4 percent during the second quarter. Economists polled by Thomson Reuters were expecting growth of 5.3 percent.
The major indexes fell 1 percent yesterday as investors worried that the market's steep gains in the past month could unravel if the economy doesn't show more signs of strengthening. Warnings about the health of banks and uneasiness ahead of the Federal Reserve's economic statement Wednesday led investors to dump financial stocks and wade into defensive areas like consumer staples companies and government debt.
Meanwhile, a record 10th straight monthly drop in wholesale inventories brought a fresh reminder that a recovery in the economy is likely to be gradual.
But many analysts said investors weren't panicking yesterday. They were taking a much-needed pause following a rally that seemed to be going at breakneck speed. The Standard & Poor's 500 index had reached at its highest level since last fall, rising 15 percent in just four weeks and 49 percent from a 12-year low in early March.
"This sort of give-and-take is quite healthy," said Erik Davidson, managing director of investments at Wells Fargo Bank in Carmel, California. "You're up 50 percent in five months. That's 10 percent a month. In quote-unquote normal markets that's five years worth of returns."
Moreover, traders often become jittery when the Fed policymakers meet to discuss interest rates. It is widely expected that the central bank will hold interest rates at their historic low of essentially zero, but investors are waiting to see what the Fed has to say about the economy when the meeting concludes Wednesday.
"It's pretty clear that a lot of people are pulling back any bets pending what is going to happen with the Fed," said Max Bublitz, chief strategist at SCM Advisors in San Francisco.
There were some troubling developments during the day, however. Downbeat comments from analysts about banks weighed on the market. Analyst Richard Bove of Rochdale Securities predicted that bank earnings won't improve for the second half of the year and that many companies will post losses.
"It just takes the euphoria feelings off the table," said Dave Rovelli, managing director of trading at brokerage Canaccord Adams, referring to Bove's comments and recent optimism among investors.
With many traders on vacation, volume was light, which tends to skew price moves.
The Dow Jones industrial average fell 96.50, or 1 percent, to 9,241.45. It had been down as much as 121 points. It was the biggest drop since July 7, when the index lost 161 points. The Dow slipped 32 points Monday.
The broader S&P 500 index also had its worst day since July 7, falling 12.75, or 1.3 percent, to 994.35.
The Nasdaq composite index fell 22.51, or 1.1 percent, to 1,969.73, while the Russell 2000 index of smaller companies fell 9.75, or 1.7 percent, to 562.12.
About three stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion traded Monday.
The Chicago Board Options Exchange's Volatility Index spiked in a sign of investors' nervousness. The VIX, also known as the market's fear index, rose 4.1 percent to 26.01, its highest level in a month. It is down 35 percent in 2009 and its historical average is 18-20. It reached a record 89.5 in October at the height of the financial crisis.
Bond prices jumped as stocks retreated. The gains followed a solid showing at the first of the week's three auctions for a record US$75 billion in debt. Prices often fall when the government introduces supply to the market. The sale yesterday was for US$37 billion in three-year notes and the government will auction US$23 billion in 10-year notes today.
Investors watching for a drop in buyers because that could force the government to increase the interest it pays, which would drive up borrowing costs for consumers and slow an economic recovery.
The yield on the three-year note, which moves opposite its price, fell to 1.72 percent from 1.78 percent late Monday. The yield on the benchmark 10-year Treasury note fell to 3.67 percent from 3.78 percent.
Among banks, Citigroup Inc. fell 25 cents, or 6.4 percent, to US$3.69. Wells Fargo & Co. slid US$1.75, or 6.1 percent, to US$26.89.
The KBW Bank Index, which tracks 24 of the largest U.S. banks, fell 4.4 percent.
Analyst downgrades made traders cautious about the overall economy.
Bond insurer MBIA Inc. tumbled 78 cents, or 12.6 percent, to US$5.39 after J.P. Morgan Securities cut its rating on the stock over concerns the company could face steep losses from bad debt.
Yum Brands Inc. fell after an analyst at UBS lowered his rating on the company because of concerns about sales. The parent of the Pizza Hut, Taco Bell and KFC fast-food chains fell US$1.40, or 3.8 percent, to US$35.13.
The day's economic readings were mixed. The Commerce Department said businesses cut inventories at the wholesale level for a record 10th consecutive month in June. The drop has contributed to the recession. In one bright spot, sales rose 0.4 percent for a second straight month, the first back-to-back increases in a year.
The Labor Department said productivity - which measures the amount of output per hour of work - grew 6.4 percent during the second quarter. Economists polled by Thomson Reuters were expecting growth of 5.3 percent.
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