Fed causes steep selloff
August 21, 2001: 4:32 p.m. ET
Rate cut, coupled with warning of more to come, worries investors
By Staff Writer Catherine Tymkiw
NEW YORK (CNNfn) - U.S. stock markets plunged Tuesday after the Federal Reserve lowered interest rates, sending a signal to investors that the economy remains weak.|
A Fed statement, indicating that more rate cuts are possible in the future, let the bears out on Wall Street and weighed heavily on both the Dow industrials and the Nasdaq composite index.
The Nasdaq fell to its lowest level in nearly four-and-a-half months while the Dow plunged more than 140 points to a six-week low.
"There was clearly a disappointment in the rhetoric from the Fed," Art Hogan, chief market analyst with Jefferies & Co., told CNNfn's Street Sweep. "It's just a buyers strike."
The Fed lowered the key federal funds rate by a quarter of a percentage point to 3.5 percent. Traders who had hoped for a greater cut or more aggressive statement positioned themselves accordingly, but were quick to sell after the announcement merely met expectations. And the accompanying statement, laced with pessimism, didn't help.
"You had a lot of people buying ahead of the Fed meeting because they were hoping the tone of the meeting would be anything but what some of the comments were," said Nick Angiletta, global head of trading with Salomon Smith Barney. "They were hoping the tone would be geared toward seeing signs of improvement."
Adding to the sentiment-driven selloff was a spate of technical selling which could mean more downward moves for the major indexes in the near-term.
"On a technical basis this market look like it's going lower and that's what people are looking at," said Angiletta. "They're looking at the charts and the technicals because there are no fundamentals to look at in the near-term."
The Nasdaq composite index lost 50.03 points to 1,831.32, having been up about 10 points just before the Fed's announcement. The Dow Jones industrial average shed 145.938 points to 10,174.14, erasing a pre-announcement 44-point gain. The Standard & Poor's 500 slid 14.15 points to 1,157.26.
The earlier gains were driven by hopes for a more aggressive cut or at least a change in bias. A rate cut was already nearly a foregone conclusion but the negative tone in the statement left many investors nonplussed.
"We knew it was coming but there were some rumors of a possible 50 basis point cut (a half a percentage point) and every time that happens it sets us up for disappointments," said Charles Payne, president of Wall Street Strategies. "The reality is a very large majority of people don't know how to react to this so they're taking their cue from the market. It's really indecision."
The selloff was indiscriminate. For example, fueling the Dow's decline were shares of American Express (AXP: down $1.55 to $36.60, Research, Estimates), IBM (IBM: down $2.21 to $101.89, Research, Estimates) and United Technologies (UTX: down $1.46 to $72.10, Research, Estimates).
And any earlier pockets of strength on the tech heavy Nasdaq gave way, led by Cisco Systems (CSCO: down $0.89 to $16.01, Research, Estimates), Oracle (ORCL: down $0.68 to $14.13, Research, Estimates) and Dell Computer (DELL: down $0.71 to $22.01, Research, Estimates).
"There doesn't appear to be any reason why this market will break out of its current trading range. Inventories continue to be high and demand does not seem to be as high as it could be," said Alan Ackerman, senior vice president with Fahnestock & Co..
Market breadth was negative. On the Nasdaq, decliners topped gainers 2,323 to 1,299 on anemic volume of 1.3 billion shares. On the New York Stock Exchange, decliners beat advancers 1,747 to 1,348 as 1.01 billion shares changed hands.
In overseas stock markets, Asia's rose while Europe's were mixed. Treasury securities edged higher. The dollar was flat against the euro and weaker versus the yen.
Another rate cut, now what?
The Fed meeting brought this year's total number of rate cuts to seven, with the key federal funds rate being brought down by a total of 3 percentage points to 3.50 percent.
Aside from the rate decision, investors digested the accompanying statement.
Now that the second-quarter corporate results are finally reported, investors are looking for signs that the economic slowdown is steadying and getting ready for some turnaround by early 2002.
"What the market would like to see is some sign of bottoming and that the market is reacting positively to the past six cuts," Arthur Cashin, director of floor trading with UBS PaineWebber, told CNNfn's The Money Gang. "The market is heavily oversold and we have a real coiled spring here just waiting for a release."
Analysts were split about whether or not the Fed was done easing.
"I don't think we're gong to get any more at all," Diane Swonk, chief economist with Bank One, told CNNfn's The Money Gang.
Still, some analysts suggested there could be more rate cuts to come.
"The FOMC retained its bias toward ease, as they have been since the beginning of the year and this suggests that the Fed is prepared to ease again unless there is a revival in economic growth," wrote Steven Wood, economist with FinanciaOxygen, in a research note. "Although there is substantial policy stimulus in the pipeline, it is still an unanswered question of whether it will be sufficient to counterbalance the contractionary forces mentioned above."
And in its statement, the Fed signaled that the rate-cut campaign that began Jan. 3 may need to continue. "Profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy," the Fed said. "The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
Many investors remain jittery about the timing of an economic turnaround, especially when analysts continue to push forecasts further out.
Still, analysts agree that a recovery is coming -- investors just need to be patient.
"I think the worst may be behind us but it's not clear how long it will take," Mary Farrell, investment strategist with UBS PaineWebber, told CNNfn's Before Hours.
Retailers sell off
A trickle of mixed reports from retailers prompted investors to err on the side of caution in the face of a slowing economy. Despite some positive results, most investors remained skeptical.
"Most of the retailers are watching their advertising dollars very carefully," said Fahnestock's Ackerman. "This is not going to be an easy period for retailers but it could be worse. Tax refunds are certainly playing some positive role in consumer spending patterns."
Staples (SPLS: down $0.93 to $15.29, Research, Estimates) posted lower fiscal second-quarter results that matched Wall Street expectations as the nation's No. 2 office supply retailer's sales remained flat amid a slowing economy.
Two retailers posted higher fiscal second-quarter results, with warehouse club retailer B.J.'s Wholesale Club (BJ: down $2.53 to $52.74, Research, Estimates) reporting a 17 percent rise in profit and luxury apparel chain Talbots (TLB: down $3.87 to $36.68, Research, Estimates) logging a 22 percent increase despite the slowing economy.
Discount department-store chain Target (TGT: down $1.74 to $35.36, Research, Estimates) reported second-quarter earnings of 30 cents a share, matching Wall Street expectations, and said it was comfortable with earnings forecasts for the full year.
Other retailers were sold off, including Dow components Wal-Mart Stores (WMT: down $1.65 to $49.94, Research, Estimates) and Home Depot (HD: down $1.70 to $48.10, Research, Estimates).
Also in focus was technology testing equipment maker Agilent Technologies (A: up $0.36 to $26.45, Research, Estimates), which joined a host of other tech firms by warning that the loss for its current quarter will be much wider than previously forecast. The company also plans to reduce its work force by about 4,000, or 9 percent. At the same time, Agilent reported a narrower-than-expected loss for its third quarter.
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