Today's Market: Stocks End at Day's Lows After Fed Drops the Ball

Wall Street hit the sell button after the Federal Reserve cut the fed funds rate -- the interest rate at which banks lend to each other overnight -- by 50 basis points. The Dow ended down 239 points to 9720 and the Nasdaq lost 94 to 1857.

Shortly after 2:15 p.m. EST, when the announcement was made, trading was choppy. But the Dow Jones Industrial Average , which popped above the key 10,000 watermark at 2:20 p.m. EST, has been trading back below that point since about 2:25 p.m. EST. Similarly, the Nasdaq Composite Index was trading at its lowest level of the day, after a brief stint above the flatline.

In a move that left investors trying to figure out where to take stocks, the Fed cut the fed funds rate by 50 basis points, to 5% today. Ahead of the decision, investors were hoping for a 75 basis-point cut to get the market back on its feet. But the Fed opted for the smaller move, probably because recent economic reports have indicated a slowdown, rather than a recession, in the economy.

Ahead of the decision, most traders were gaming for a half-percentage point cut. "I think it's 50, a little selloff and then you buy them," said Brian Finnerty, head of trading at C.E. Unterberg Towbin. "The third cut is usually the one that makes things go up, and recent negativity in analyst reports indicates a real bottoming sentiment -- that's when things start to turn." TheStreet.com tracked recent Fed moves, including the two cuts in January, and the market's reaction.

Since the beginning of the year, the Federal Reserve has acted drastically in cutting interest rates, in order to spur borrowing and demand in the economy, which fell sharply in the fourth quarter of last year. The Fed has now lowered the fed funds target by 1.5% from 6.5%, where it stood before the committee undertook a surprise rate cut Jan. 3.

Major Indices INDEX CHANGE % VALUE Dow 238.35 -2.39% 9720.76 S&P 500 28.22 -2.41% 1142.62 Nasdaq 93.7 -4.80% 1857.4 Russell 2000 6.79 -1.50% 444.48 TSC Internet 10.0 -4.34% 220.6 NOTE CHANGE PRICE YIELD 10-Year Treasury 8/32 101 21/32 4.789% Market data as of: 4:06 p.m. EST, Mar. 20, 2001

Today's move attempts to balance the signals being given in economic reports, which show a reasonable amount of demand in the real estate and automobile markets, as well as in the level of foreign demand, against the sharp declines in business investment and the steep drop in the stock market.

Still, the catalyst for a real market rebound, market experts say, will be an improvement in corporate earnings -- which, at this rate, may be harder to come by than a 75 basis point cut.

To wit: Chipmaker KLA-Tencor (KLAC Quote), off 8.1% to $38.38, warned after the closing bell yesterday that third quarter earnings and revenue would fall short of Wall Street's forecasts. The semiconductor manufacturer cited the usual suspects -- high inventories and sluggish demand.

Today's news comes on the heels of some very negative news in the sector. Just yesterday, Ashok Kumar at U.S. Bancorp Piper Jaffray said that Intel (INTC Quote) could test its lows of 1998 in the second half of 2001. That would drop Intel, down 9% to $24.63 today, into the high teens.

According to Joseph Kalinowski, equity strategist for earnings tracker First Call/Thomson Financial, the Nasdaq may be headed for still more trouble ahead. "Given the price swings and adjustments in earnings expectations, the index currently trades 48.6 times earnings, still overvalued if you use the historic norm of the 90s," Kalinowski wrote in his most recent report. "Keeping earnings constant, this multiple suggests a composite trading near 1200." Ouch!

Separately, contract electronics manufacturer Solectron (SLR Quote) was getting hit after it warned that sales for 2001 would fall short of projections and announced that it would cut 8,200 jobs, or 10% of its workforce, amid an uncertain outlook. This morning, Credit Suisse First Boston lowered its earnings estimates on Solectron, rival Flextronics (FLEX Quote) -- down 18.7% to $19 -- and a host of other contract manufacturers.

Brokerage stocks were rising ahead of the Fed interest-rate decision, but flopped after it. Not helping the sector this afternoon was Goldman Sachs (GS Quote), which said that fiscal first quarter earnings fell 13%, still beating Wall Street's reduced estimates. Shares of Goldman Sachs ended off 4.3% to $87.06. Analysts have been giving brokerages more interest, saying rate cuts could act as a catalyst for more merger and acquisition activity and renewed underwriting.