NEW YORK (CNN/Money) -
Stocks and Treasury bonds fell Tuesday after the Federal Reserve held interest rates steady and changed its outlook on the economy -- a sign to some investors that the central bank might be getting set to raise short-term rates down the road.
The Nasdaq composite (down 40.53 to 1908.32, Charts) slid 2.1 percent while the Dow Jones industrial average (down 41.85 to 9923.42, Charts) lost around 0.4 percent. The Standard & Poor's 500 (down 9.12 to 1060.18, Charts) index edged down 0.9 percent.
Treasury bond prices sank, pushing the 10-year note yield up to 4.35 percent from 4.27 percent late Monday. Prices and yields move in opposite directions.
The dollar recovered a bit after hitting fresh record lows against the euro and also bounced up after briefly touching a new three-year low against the yen.
As expected, Tuesday's Fed meeting resulted in no change in the Fed's key short-term interest rate. Some investors thought the central bank might change its statement saying it plans to keep rates low for a "considerable period."
The Fed kept that phrase but made another change, saying that the risk of inflation dropping undesirably low was now almost balanced with the risk of rising inflation.
"The Fed has begun to prepare the markets for higher interest rates," Ian Shepherdson, chief U.S. economist at High Frequency Economics wrote in a note late Tuesday, citing the line about the risk of inflation and deflation being "almost balanced."
"Preparing the markets for a rate hike is a process in which the Fed gradually has to back away from its unduly pessimistic stance of recent months," Shepherdson wrote. "This will take some time, but the process is now underway."
The central bank's policy-makers noted in their statement that economic output was "expanding briskly," and the labor market was improving.
Other analysts said the Fed's comments were about in line with what investors expected.
"They said pretty much what people were expecting," said Michael Carty, principal at New Millennium Advisors. "Maybe some people were hoping that they might say something new, and are using the fact that they didn't as a reason to sell."
The Dow managed to cross 10,000 twice during the session, once after the start of trading and once right before the Fed's statement was released. But any hopes for the Dow to close above 10,000 were dashed by the selloff that followed the Fed's statement.
The last time the Dow closed above the psychological barrier of 10,000 was May 24, 2002, when it settled at 10,104.26. Last week, the Nasdaq composite briefly crossed through the 2,000 level.
The market's recent highs, as well as the inclination to take some profits near year-end, played into the market's selloff Tuesday, analysts said.
"People are selling into some of the gains from the run this year and moving into the more defensive names," Carty said. "I think you could see more sideways movement for the next few weeks."
After the close of trade, Verizon Communications (VZ: down $0.42 to $32.59, Research, Estimates) said it will record approximately $3.7 billion in charges during the current quarter and first quarter of 2004, due to severance payments to cover an early retirement plan and pension settlements. The stock showed almost no change in after-hours trade.
There are no economic reports due Wednesday. Thursday will bring reports on November retail sales, October business inventories and weekly jobless claims.
On the move
As has been the case in recent sessions, some of the tech stocks that have enjoyed the biggest gains this year pulled back as investors shifted money into stodgy blue chips that have lagged the broader market rally.
The semiconductor sector, one of the most buoyant of the year, led the technology declines. November sales that were in line, but perhaps not as bullish as had been hoped from contract chipmakers Taiwan Semiconductor (TSM: down $0.44 to $10.12, Research, Estimates) as well as United Microelectronics (UMC: down $0.17 to $4.89, Research, Estimates), added to the sector selloff.
Intel (INTC: down $1.39 to $30.25, Research, Estimates) lost 4.4 percent, Advanced Micro Devices (AMD: down $0.82 to $14.92, Research, Estimates) lost 5.2 percent, and Texas Instruments (TXN: down $0.75 to $27.49, Research, Estimates) lost 2.7 percent, despite the fact that TI raised its earnings and revenue forecasts for the current quarter late Monday.
Cisco Systems (CSCO: down $1.06 to $23.23, Research, Estimates) and Sun Microsystems (SUNW: down $0.19 to $4.18, Research, Estimates) both lost 4.3 percent in the rush to cash in on recent big gainers.
Among other decliners, consumer products maker Newell Rubbermaid (NWL: down $1.97 to $21.00, Research, Estimates) fell 8.6 percent in active NYSE trade after the company cut its 2003 earnings forecast for the second time this year, citing weak sales. The company also warned that 2004 earnings would miss estimates.
Shares of Washington Mutual (WM: down $3.88 to $39.97, Research, Estimates) lost 8.8 percent in active NYSE trade after the bank warned that its 2003 and 2004 earnings would come in lower than expected. The company also said it had cut 4,500 jobs since August due to smaller demand for mortgage loans.
On the upside, a pair of Dow stocks bounced on brokerage upgrades.
General Motors (GM: up $1.27 to $48.41, Research, Estimates) gained 2.7 percent after Goldman Sachs upgraded the stock to "outperform" from "in line." International Paper (IP: up $0.38 to $40.61, Research, Estimates) added 0.9 percent after Morgan Stanley upgraded it to "equal-weight" from "underweight."
Market breadth was negative, with losers beating gainers by nearly three to two on the New York Stock Exchange where 1.40 billion shares traded. On the Nasdaq, where 1.79 billion shares changed hands, declining issues beat advancers by more than eleven to five.
NYMEX light sweet crude oil futures fell 34 cents to settle at $31.76 a barrel. COMEX gold gained $1.40 to settle at $408.90.
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