Markets & Stocks

Stocks worried by war
Mild selling pushes markets to a modest decline amid concern about the pace of war in Iraq.
March 26, 2003: 5:52 PM EST
By Alexandra Twin, CNN/Money Staff Writer

NEW YORK (CNN/Money) - U.S. stock markets closed barely lower Wednesday after mild selling hit stocks throughout the day, with nervous investors reluctant to make substantial moves in an environment dictated by the uncertainty and confusion surrounding the war in Iraq.

The Dow Jones industrial average (down 50.35 to 8229.88, Charts) and the Standard & Poor's 500 (down 4.79 to 869.95, Charts) index both closed marginally lower, while the Nasdaq composite (down 3.56 to 1387.45, Charts) ended near the unchanged line. All three indexes had moved both higher and lower earlier in the session.

Treasury prices ended the session little changed, while oil and gold rose.

"We seem to be certainly playing to the ebb and flow of the news on the Middle East," said Brett Gallagher, head of U.S. equities at Julius Baer. "You had talk that the national security level would be raised and the market sold off immediately, then popped back up once it was dismissed. That's the kind of market we're in. It's rumor-driven, technical and the fundamentals are not playing a role."

"I don't think individual investors should be playing this market right now, making bets based on the latest Iraq news," Gallagher said. "Once the war ends, we've got underlying fundamental issues that will return to focus. The war is not the reason the economy is having trouble. Fundamentals have gotten worse since the beginning of the year and yet the market has gone higher because of the focus on Iraq."

Investors will get some insight into the U.S. economy Thursday, upon the release of a number of data. Weekly jobless claims are forecast to come in almost unchanged from the previous week's 421,000, while the final revision of gross domestic product growth is expected to show no change from the 1.4 percent previously recorded.

Thursday also brings earnings news from brokerage A.G. Edwards (AGE: down $0.61 to $27.03, Research, Estimates) and food maker ConAgra Foods (CAG: down $0.30 to $21.53, Research, Estimates).

All eyes on Iraq

Stocks showed little direction throughout Wednesday's session, implying a period of settling after the recent rally. The Dow took a sudden, brief dip in the mid-afternoon on a trading floor rumor that the national terror threat level would be raised to "red," or "severe," from the current "orange, " or "elevated," but recovered some of those losses by the close, once the rumor passed.

But even prior to that rumor, markets looked unlikely to extend the rally amid reports that progress in Iraq has slowed, as Iraqi paramilitary groups are putting up a much stronger fight than U.S. officials had anticipated. Secretary of Defense Donald Rumsfeld said Tuesday that war is closer "to the beginning than the end" and that action will probably get more brutal as U.S. forces try to enter Baghdad, while President Bush said Wednesday that forces are progressing, but the war is far from over. (For more details, go to's special war coverage.)

"The market seems to be going along in reaction to the war and that's what gives us this volatility," said John Davidson, president and CEO at PartnersRe Asset Management. "At first, the response was, 'Well, at least we've finally started,' then it moved to 'it seems to be going well,' but then we encountered bumps on the road to Baghdad and you're seeing that reflected in the stock action now."

War speculation has influenced market direction for months, distracting investors from concerns at home, including the still struggling economy and sluggish corporate earnings growth. Stocks had rallied sharply for eight sessions, with the Dow gaining nearly 1,000 points, before suffering a huge setback Monday. Tuesday's action was more mixed, with stocks managing to close higher, but without the euphoria that had paced the earlier run.

The initial spurt of buying had stemmed from relief that the uncertainty about when and if war would start was finally over after months of speculation. The second wave of buying sprang from countless reports showing that coalition forces were progressing fairly smoothly and hopes that the war would be short. But the rally hit roadblocks this week as troops encountered a tougher defense from Iraqi forces than expected, indicating that the war will likely last months, rather than weeks or days.

News at home is troubling, too

Although overshadowed amid the war focus, an early morning report on durable goods orders gave investors a taste of what domestic concerns remain when the war ends. Orders for goods from U.S. manufacturers in February fell 1.2 percent, in line with estimates, according to a Reuters poll. It was the largest fall since November and followed a rise of 1.9 percent in January.

In addition, new home sales in February fell to an annual rate of 854,000 units, from a revised rate of 929,000 units in January. Analysts surveyed by Reuters expected a rise to 935,000 units.

The drop in durable goods orders was not as notable as the drop in housing, said PartnersRe's Davidson, as it follows a drop in existing home sales earlier in the week. The fall could be a cause of concern for investors because housing has been a pillar of strength in the economy. But he added that investors were not particularly focused on the economic news amid the war.

"People expect that a new picture will develop economically once the war ends, so they're not focused on these numbers right now," he added.

Investors may have also continued to react to the late Tuesday announcement that the Senate reversed course and decided to cut more than half of President Bush's proposed $726 billion tax cut, due to the increased spending on the war. Analysts said the reduction makes a proposed end to the so-called "double taxation" of dividends almost impossible.

In corporate news, shares of Reliant Resources (RRI: down $0.95 to $3.05, Research, Estimates) plunged 23 percent and topped the NYSE's most-active list amid a spate of setbacks for energy stocks. Federal regulators charged 37 energy companies with conspiring with Enron in suspect trades during the California energy crisis of 2000 and 2001. The Federal Energy Regulatory Commission ruled that the state of California was owed $3.3 billion in refunds. The FERC also said it may remove the wholesale trading privileges of Reliant due to its trading activities during that period.

In the technology sector, news that IBM (IBM: down $1.90 to $81.55, Research, Estimates) has been selected to make a new graphics chip for Nvidia (NVDA: up $0.39 to $14.41, Research, Estimates) was bad news for Taiwan Semiconductor (TSM: down $0.51 to $7.58, Research, Estimates), which would have otherwise gotten the multiyear contract, valued at several hundred million dollars. Taiwan Semiconductor had previously been the exclusive supplier of chips for Nvidia. Shares of TSM fell 6 percent in unusually heavy trading.

Shares of Dow stock Honeywell (HON: down $0.17 to $22.31, Research, Estimates) recovered most of its losses by the close, after UBS Warburg cut its rating on the jet maker to "neutral" from "buy," amid concerns that the company's earnings this year could be at risk due to a worse-than-expected downturn in the jet market. Fellow Dow aircraft maker Boeing (BA: down $0.97 to $26.40, Research, Estimates) tumbled 3 percent.

The Dow's big industrial cyclical stocks also declined, with Alcoa (AA: down $0.55 to $20.78, Research, Estimates) off 2.5 percent and International Paper (IP: down $0.86 to $35.63, Research, Estimates) down 2 percent.

On the upside, shares of Sears (S: up $2.69 to $24.14, Research, Estimates) added 12 percent after the company said it may put its struggling $30 billion credit card portfolio up for sale as a means of remaking itself as purely a retailer.

Market breadth was negative on lighter volume that what stocks had seen during the recent rally. Decliners beat advancers 9 to 7 on the New York Stock Exchange and 8 to 7 on the Nasdaq. On the NYSE, 1.29 billion shares changed hands, while on the Nasdaq, 1.38 billion shares traded.

Treasury prices were almost unchanged, with the 10-year note gaining 2/32 of a point in price, pushing its yield down to 3.93 percent. The dollar was little changed versus the euro and the yen.

Light sweet crude oil futures rose 66 cents to $28.63 a barrel in New York. Gold added $1.80 to $330.10 an ounce.  Top of page

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