NEW YORK (CNN/Money) -
U.S. stocks tumbled Thursday for the second session in a row, as worries about interest rates reared their ugly head again, this time on the heels of the morning's mixed read on gross domestic product growth in the first quarter.
The Nasdaq composite (down 30.70 to 1958.78, Charts) fell nearly 1.6 percent, the Standard & Poor's 500 (down 8.50 to 1113.89, Charts) index lost 0.75 percent and the Dow Jones industrial average (down 70.30 to 10272.27, Charts) lost 0.7 percent. Declines were steeper one hour before the close.
"The market is in one of these funks where it puts a negative spin on everything," said Donald Selkin, director of research at Joseph Stevens. "I don't see what's going to pull us out of this in the short term."
The issues that have kept stock markets rangebound over the last few weeks are not likely to be resolved soon, he added. In addition to interest rates, investors are mulling over continued high oil prices and the ongoing war in Iraq and what the cost of it will mean for the U.S. economy. Also at issue is the likelihood that earnings growth will slow in the second half of the year, as comparisons to earnings growth in the year-earlier period get tougher.
"The market looks ahead, and maybe investors are worried that between the higher interest rate picture and the decelerating profit growth, the market may have a tough time advancing," Selkin said.
Economic reports are due early Friday on personal income and spending, consumer sentiment and manufacturing in the Chicago area. Judging by recent reactions to strong data, if the numbers tomorrow are particularly strong, that could spark new interest rate worries and cause more stock declines, analysts say.
Following that, the market's next big catalyst is likely the Federal Reserve's policy meeting next week. The central bank meets Tuesday to discuss short-term interest rates. No economists surveyed by Reuters expect the central bank to raise rates from the current historically low levels at this particular meeting, but many economists do expect the central bank to change its 'bias' when it meets next week to suggest an inclination toward raising interest rates.
Fed funds futures suggest rates could rise by a quarter-percentage point in August.
Thursday's market
Stock markets opened in modestly positive territory Thursday, but then almost immediately headed lower. Selling intensified in the afternoon and eased up a bit by the close, but the tone remained very negative.
Worries about interest rates remained front and center as investors sorted through the morning's first-quarter GDP report. The preliminary read showed the economy grew at a 4.2 percent annual rate. This was short of the 5 percent rate economists had expected. GDP grew at a 4.1 percent annualized rate in the fourth quarter.
Other aspects of the report confirmed inflationary trends, including rises in the chain price deflator and the core personal consumption spending index, both of which are closely watched by the Federal Reserve.
All of which spooked the market, leaving investors to chew over an economy that grew more slowly than expected, while inflation rose.
"Short-term, what the market is taking from the GDP report is that inflation is higher, and there's less economic growth than we thought, and that's putting a crimp on things today," said Peter Green, a market analyst at MKM Partners.
Other issues weighing on the market included the ongoing events in Iraq and President Bush and Vice President Dick Cheney's joint appearance before the 9/11 Commission.
The market tumbled Wednesday on a combination of worries about interest rates and Thursday's GDP number, as well as comments from China's Premier that his country would be taking action to slow its booming economy. Worries about China's lower demand continued to weigh on a variety of sectors Thursday.
"The 2003 rally was on low interest rates and a weak dollar," Green added. "Now, that's changed. The dollar bottomed in February, and I think people are realizing what higher rates are going to mean for the stock market."
What moved?
Internet stocks were very active in afternoon trade following news that popular search engine Google has registered with the Securities and Exchange Commission for a $2.7 billion initial public offering, confirming the last year of speculation.
Rival Yahoo! (YHOO: down $1.10 to $54.71, Research, Estimates) dropped two percent, with Google's filing saying that it intends to terminate its current pact with Yahoo! this summer. Rivals FindWhat.com (FWHT: down $1.00 to $21.00, Research, Estimates) and Ask Jeeves (ASKJ: down $2.10 to $38.75, Research, Estimates) also fell.
Smaller rival LookSmart (LOOK: unchanged at $2.44, Research, Estimates) gained on the Google news. After the close the company reported a quarterly loss that was narrower than expected and down from a profit a year earlier.
Technology shares were particularly vulnerable Thursday, Green said, partly because of weakness in semiconductors, with the Philadelphia Semiconductor (down 11.80 to 450.48, Charts) index, or the Soxx, breaking through a key support level in the morning and sliding from there. The Soxx lost 2.4 percent, after having been down close to 4 percent earlier.
Among the companies dragging down the Soxx, and by extension, the Nasdaq: Texas Instruments (TXN: down $1.29 to $25.43, Research, Estimates) fell 4.8 percent, National Semiconductor (NSM: down $1.65 to $41.30, Research, Estimates) fell 3.8 percent and Intel (INTC: down $0.20 to $26.13, Research, Estimates) fell 0.8 percent.
JDS Uniphase (JDSU: down $0.60 to $3.25, Research, Estimates) fell more than 15.80 percent, topping the Nasdaq's most-actives list, and pressuring some other techs. The network gear maker reported a narrower loss in its fiscal fourth-quarter that was nonetheless worse than what analysts were expecting. The company also warned that its current quarter would fall short of expectations and that the outlook for a recovery in its sector remains murky.
Other big cap techs also tumbled, including Oracle (ORCL: down $0.40 to $11.43, Research, Estimates) and Sun Microsystems (SUNW: down $0.10 to $3.99, Research, Estimates), both of which fell nearly 3 percent.
On the upside, strong earnings helped send Time Warner (TWX: Research, Estimates), parent of CNN/Money, up 2.8 percent. The company reported earnings that rose from a year earlier and topped estimates.
Gillette (G: up $2.25 to $41.20, Research, Estimates) added 6.2 percent after the company posted a fiscal fourth-quarter profit that surpassed expectations, owing to the impact of the weak dollar, cost cutting and demand for its razors.
Market breadth was mixed and volume was heavy. On the New York Stock Exchange, some 1.85 billion shares changed hands, with advancers edging decliners by more than eight to seven. On the Nasdaq, 2.34 billion shares traded, with losers topping winners by a more than five-to-one margin.
The weekly jobless claims report, also released before the start of trading, showed that 338,000 Americans filed new claims for unemployment benefits last week, down from the previous week's upwardly revised 356,000, and less than the 343,000 economists surveyed by Briefing.com were expecting.
Treasury prices fell. The 10-year note fell 9/32 of a point, its yield rising to 4.53 percent from 4.50 percent late Wednesday. Bond prices and yields move in opposite directions. The dollar was lower versus the euro and yen.
Among commodities markets, NYMEX light sweet crude oil futures shed 15 cents to $37.31 a barrel. COMEX gold added $1.20 to settle at $387.10 an ounce.
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