NEW YORK (CNNfn) - It was a mixed day for U.S. stocks Wednesday after the Federal Reserve cut interest rates by a quarter of a percentage point, disappointing traders who had banked on a larger cut.|
The major indexes had edged higher prior to the 2:15 p.m. ET announcement, but quickly reversed course on the news and spent the rest of the trading session straddling the breakeven point.
"There's not a lot of money being put to work and it's kind of a 'blah' day," Sam Ginzburg, director of global sales and trading with Gruntal & Co., told CNNfn's Street Sweep.
The roller-coaster reaction was mostly driven by the widely divided expectations about the size of the cut and the bears and bulls battled it out until the closing bell. But analysts cheered the Fed's move.
"The market's reaction has been pretty benign," said Ned Riley, chief investment strategist with Global Street Asset Advisors. "But I think the market is looking at this as more constructive than destructive. I think the market has absorbed this extremely well even though there is a downward bias."
The Dow Jones industrial average fell for the fourth straight session, sliding 37.30 points to 10,435.18. The Nasdaq composite index rose for the third straight session, advancing 10.13 to 2,074.75, while the S&P 500 slid 5.69 to 1,211.07.
Analysts said the initial selloff was merely a reflexive reaction on the part of traders who had hoped for a more aggressive move.
"I think there was a knee-jerk reaction on the part of market participants who were hoping and wanting more," said Dennis Ferro, chief investment officer with Evergreen Funds. "The Fed has shown, through its rate cuts, that it will be consistent in its support of reviving the economy, and a larger rate cut would have meant they had deeper and darker concerns."
It typically takes six to 12 months for rate cuts to make their way through the economy and a smaller rate cut could signal less concern on the part of the Fed that the economy is headed for a deep recession.
"The Fed cuts rates because they're worried about the economy," said Art Hogan, chief market strategist with Jefferies & Co. "They're not as worried because they only cut rates by 25 basis points, so things are getting better and there's stabilization."
The Federal Open Market Committee, the Federal Reserve's monetary policy-making arm, cut interest rates for the sixth time this year. The action brings the federal funds rate, the central bank's target for an overnight bank lending rate, to 3.75 percent, its lowest level since April 1994.
In the Fed's accompanying statement, it left the door open for further rate cuts, saying it still is concerned about the sluggishness of the economy.
"The U.S. economy has yet to show convincing signs of a bottom but that doesn't mean monetary policy isn't working," wrote Bruce Steinberg, chief economist with Merrill Lynch, in a note to clients. "We continue to look for a strong economic rebound by the fourth quarter."
Market breadth was positive as volume picked up. Nasdaq winners topped losers 2,093 to 1,640 as 1.71 billion shares traded. Advancing issues on the New York Stock Exchange topped declining ones 1,793 to 1,298 as 1.14 billion shares traded.
In other stock markets, Europe's were mixed while Tokyo's faltered. Treasury securities were little changed. The dollar edged higher against the euro and the yen.
Digesting the Fed decision
Investors still opted to sit on the sidelines after the Fed's interest rate cut. Most still wanted to see concrete evidence that the six rate cuts are stimulating the economy and corporate profitability.
"Investors are still looking for the economy to begin to pick up toward the end of this year with positive earnings comparisons occurring starting in the first or second-quarter of next year (2002)," said Ferro. "Trying to trade the market on the basis of whether the Fed is going to cut by 50 or 25 basis points, in a long-term portfolio, is not a prudent approach to investing."
With investors sitting on the sidelines, traders took over.
Putting pressure on the Dow were shares of Eastman Kodak (EK: down $1.32 to $45.30, Research, Estimates), Caterpillar and Exxon Mobil, but modest gains in Honeywell International (HON: up $1.10 to $37.30, Research, Estimates) and Microsoft (MSFT: up $1.00 to $71.14, Research, Estimates) offset those losses.
Technology stocks were mixed. Oracle (ORCL: down $0.40 to $18.04, Research, Estimates), Cisco Systems (CSCO: down $0.09 to $17.93, Research, Estimates) and Applied Materials (AMAT: down $1.74 to $48.47, Research, Estimates) faltered, while Qualcomm (QCOM: up $2.11 to $55.56, Research, Estimates) and Dell Computer (DELL: up $0.74 to $25.74, Research, Estimates) carved out gains.
Sifting through corporate stories
There was plenty of corporate news for traders and investors to chew on. Not much of it painted a rosy picture.
"The market is going to be held hostage to corporate earnings and there is no real evidence that there is a turnaround," said Peter Cardillo, director of research with Westfalia Investments. "So we'll continue to have what we've been having -- people not really showing any willingness to participate."
There are indications of more hard times for telecom equipment maker Lucent Technologies (LU: down $0.13 to $5.87, Research, Estimates). The Wall Street Journal reported that the company could cut another 10,000 jobs in addition to the thousands already cut in recent months. Handheld computer maker Palm (PALM: up $0.83 to $6.02, Research, Estimates) reported a fiscal fourth-quarter loss that was narrower than expected, and predicted that it will return to profitability in the next six months. The company's 16 cents a share operating loss contrasted with the 3 cent a share income reported in the year-earlier period, with sales down 52 percent. But 3Com (COMS: down $0.22 to $4.62, Research, Estimates), the networking equipment maker and Palm's former parent, posted a wider-than-expected loss for its fourth quarter.
Communications chip maker Vitesse Semiconductor (VTSS: up $0.84 to $17.41, Research, Estimates) said that it will have an operating loss in the fiscal third quarter, rather than an expected profit, due to continuing weak demand and order cancellations.
Chip maker Xilinx (XLNX: down $3.93 to $39.93, Research, Estimates) also said a slowdown in orders placed and delivered in the same quarter will reduce its first-quarter revenue by 32 percent. The company said most of its revenue is generated from these orders and the weakness reflects "a change in customer spending practices due to the overall industry downturn."
Fiber-optic component maker JDS Uniphase (JDSU: up $0.10 to $12.13, Research, Estimates) now expects layoffs to exceed the 20 percent cut in its workforce announced when it issued a profit warning April 24, according to a company spokeswoman.
It wasn't just technology bearing the brunt of negative news.
CVS (CVS: down $7.59 to $36.51, Research, Estimates), the nation's No. 2 drug store chain, warned that its second-quarter earnings will be below forecasts. The company blamed the economic slowdown for the shortfall, which will result in earnings of 48 cents a share, compared with the 52-cent consensus of analysts surveyed by First Call.
Cereal maker General Mills (GIS: up $0.50 to $42.80, Research, Estimates) reported fiscal fourth-quarter earnings of 42 cents a share, up from 37 cents a year earlier and in line with forecasts.