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Fear slams stocks
Nasdaq leads broader selloff on worries about inflation, corporate profits, rising interest rates.
October 5, 2005: 5:49 PM EDT
By Alexandra Twin, CNN/Money staff writer

NEW YORK (CNN/Money) - Stocks slumped Wednesday as worries about inflation, rising interest rates and slowing corporate profits sparked a broad-based selloff.

As of 5:30 p.m. ET, Nasdaq and S&P futures pointed to a mostly flat open Thursday, when fair value is taken into account.

The Nasdaq composite (down 36.34 to 2,103.02, Charts) lost 1.7 percent, the Dow Jones industrial average (down 123.75 to 10,317.36, Charts) lost around 1.2 percent and the broader Standard & Poor's 500 (down 18.08 to 1,196.39, Charts) index lost around 1.2 percent.

Treasury prices slipped, raising the corresponding yields, and the dollar fell versus other major currencies.

Stock declines covered a variety of sectors, with 29 out of 30 Dow issues sliding on the session.

A renewed focus on inflation has plagued the market this week, with investors homing in on such signs in Monday's strong manufacturing report and Wednesday's otherwise weaker services sector index.

Such worries were amped up Tuesday afternoon after Dallas Fed President Richard Fisher said the central bank must be vigilant in fighting off higher inflation, which the market interpreted as meaning that the Fed's rate-hike campaign wouldn't be ending anytime soon.

Wednesday comments from another Fed official -- Kansas City Fed President Thomas Koenig -- failed to temper such beliefs.

"I don't think it's any real surprise that the Fed is going to keep raising rates," said John Forelli, portfolio manager at Independence Investments. "I think the weakness is more about broader inflation expectations creeping into the market."

Such concerns certainly weighed on sentiment Wednesday, as investors continued to try to sort through the mixed readings on the economy following Hurricanes Katrina and Rita.

The Institute for Supply Management said its services sector index fell to 53.3 in September from 65 in August. The index was expected to fall to 60, according to a consensus of economists surveyed by

The prices-paid index, the survey's inflation component, rose more than expected.

The market has begun to pay more attention to economic data, now that post-hurricane reports are starting to pour in, said Art Hogan, market analyst at Jefferies & Co.

"Even if the data meet our expectations, we are going to be disappointed," he said.

Investors are looking at the specter of a slowing economy mixed with higher interest rates, higher energy prices and slowing corporate profits, and it's making them nervous, Hogan added.

Thursday's lone economic report is the weekly jobless claims read. However, it's not likely to be a big market mover, with investors more attuned to Friday's monthly report, expected to show a big decline in the wake of the hurricanes.

Earnings warnings pour in

In corporate news, the parade of earning pre-announcements continued, as is typical in the first two weeks of a new quarter.

Human Genome Sciences (down $4.10 to $9.87, Research) said Wednesday that its experimental treatment for lupus failed to meet expectations in a midlevel study. Shares of the biotech fell 29 percent in very active Nasdaq trade.

ADC Telecommunications (down $3.06 to $19.61, Research) slumped around 13.5 percent in the morning after the communications gear maker warned late Tuesday that third-quarter earnings would miss forecasts, due to weaker sales.

ADC weighed on others in the networking sector, sending the Amex Networking (down 4.81 to 235.99, Charts) index down 2 percent in the early going.

Mercury Interactive (down $5.33 to $31.57, Research) lost 14.3 percent after warning late Tuesday that third-quarter revenue would miss forecasts because of customer delays. The software maker also said a previously disclosed Securities and Exchange Commission probe into its stock-based compensation has now become a formal investigation.

Other software makers slipped too, with the Goldman Sachs Software (Charts) index losing 1.6 percent.

Automakers, homebuilders slide

The automakers were under pressure for a second session.

General Motors (down $1.45 to $28.63, Research) slumped 4.8 percent on concerns that its debt might be in for another downgrade, after ratings agency Standard & Poor's said Tuesday that it was reviewing GM's debt and could send it deeper into junk status.

More bad news for GM: The company's auto parts supplier Delphi (down $0.28 to $2.50, Research) could file for bankruptcy protection as soon as this week, according to published reports. Delphi lost 10 percent.

Homebuilders were hit hard for a second session as investors continued to bank profits after a report that insiders at some of the companies have increased their stock sales.

KB Home (down $2.99 to $67.42, Research) lost 3 percent and Toll Brothers (down $0.92 to $40.48, Research) lost 2 percent. The Dow Jones Home Construction (down $30.33 to $901.04, Research) index fell 3.3 percent.

Oil stocks suffered profit taking again, sliding with the raw commodity. The Amex Oil (down 41.96 to 997.08, Charts) index fell 4 percent.

Dow component Hewlett-Packard (down $1.08 to $27.47, Research) slipped 3.6 percent partly in response to a Financial Times report late Tuesday in which the company's CEO shot down calls to spinoff the company's printer business.

The comments followed news Tuesday that Lexmark International (down $0.18 to $43.32, Research), a rival in the printer business, had slashed its third-quarter and full-year forecast on weaker sales.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by nearly five to one on volume of 1.91 billion shares. On the Nasdaq, decliners topped advancers by four to one on volume of 1.95 billion shares.

Falling oil prices no help

U.S. light crude for November delivery fell $1.11 to settle at $62.79 a barrel on the New York Mercantile Exchange, having traded on both sides of unchanged all morning.

Prices had briefly ramped up following the release of the weekly oil inventory report, which showed a bigger-than-expected drop in gasoline stocks, overall crude supplies and distillate stocks, which include heating oil.

Treasury prices gained, lowering the yield on the 10-year note to 4.34 percent from 4.37 percent late Tuesday. Treasury prices and yields move in opposite directions.

The dollar fell versus the euro and yen.

COMEX gold ended the session at $469.30 an ounce, unchanged from Tuesday.  Top of page

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