Fed Whacks Stocks
Updated from 4:10 p.m. EST
Stock and bond prices reversed sharply and fell Tuesday after the
Federal Reserve
highlighted inflation concerns in the policy statment accompanying a quarter-point interest rate hike.
The
Dow Jones Industrial Average
closed down 94.88 points, or 0.90%, to 10,470.51, its lowest close since Jan. 28. The average was up about 40 points prior to the Fed's announcement. The
S&P 500
lost 12.07 points, or 1.02%, to 1171.71, while the
Nasdaq Composite
lost 18.17 points, or 0.91%, to 1989.34.
The Nasdaq finished below 2000 for the first time since Nov. 2.
"Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually," the Fed said in its policy statement. "Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices."
The 10-year Treasury note went from up 10/32 in price before the Fed statement to down 24/32. Its yield went from 4.48% to 4.62%. Compared with the euro, the dollar traded at $1.308, up sharply from an earlier low of $1.323.
Closing volume on the
New York Stock Exchange
was 1.68 billion shares, with decliners beating advances by a ratio of 2.5-to-1. Volume on the Nasdaq was 1.86 billion shares, with decliners beating advancers 9-to-2.
While the Fed stuck to its plan to raise rates at a measured pace,
small changes in its language -- including the assertion that "appropriate monetary policy" is needed to keep risks balanced -- spooked the markets.
"The economy has slipped into another oil-induced soft patch, and the Fed will continue to tread lightly," said Richard Yamarone, director of economic research at Argus Capital. "By keeping the 'measured pace,' the Fed has almost painted themselves in a corner. Now, anything but the measured pace will seem like a drastic move."
Still, other observers read the tweaks as a nonevent.
"The FOMC announcement was pretty much in line with what the market expected," said John Hughes, equity strategist at Shields & Co. "We continue to be oversold on a short-term basis, especially in the financial sector. There still isn't any real leadership, and not much will work to the upside."
Earlier, the February producer price index came in at plus 0.4%, slightly above economists' consensus estimate of 0.3%. Excluding food and energy, the core PPI rose 0.1%, matching forecasts. The data supported stocks, which had trended lower in the premarket.
Oil futures closed down $1.43 to $56.03 on Nymex. A report showing a small year-over-year decline in Chinese oil imports in February contributed to the downtick.
Among companies,
Electronic Arts
(ERTS)
finished down 16.8% after the video game giant lowered its fourth-quarter earnings and revenue estimates because of weak sales in North America and Europe. The company expects to earn 6 cents to 8 cents a share in the quarter on revenue of $525 million to $550 million. Wall Street had been expecting earnings of 25 cents to 30 cents a share on sales of $700 million. The stock closed down $11.20 to $55.15.
Other video-game stocks feeling pressure on the Electronic Arts warning were
Activision
(ATVI) - Get Report
,
Take-Two
(TTWO) - Get Report
and
THQ
(THQI)
. Activision closed down 50 cents, or 2.2%, to $22.49, while Take-Two closed down 67 cents, or 1.6%, to $40.75. THQ finished down 90 cents, or 3%, to $28.75.
The bloodletting continued at
American International Group
(AIG) - Get Report
amid a probe into the company's reinsurance dealings with a unit of
Berskshire Hathaway
(BRKA)
. AIG last night fired Chief Financial Officer Howard Smith and Vice President Christian Milton, according to
The Wall Street Journal
. Both executives signaled they planned to invoke their right against self-incrimination in the probe, which is focusing on whether the company arranged a reinsurance deal four years ago as a risk-free way of boosting its loss reserves. AIG finished down $1.70, or 2.9%, to $56.20.
Oracle
(ORCL) - Get Report
,
which reported earnings after the market closed, earlier prevailed in the bidding war for
Retek
(RETK)
, striking a definitive agreement Monday night to acquire the retail-industry software provider for $11.25 a share.
SAP
(SAP) - Get Report
, the German software company that also tried to acquire Retek, confirmed this morning that it has withdrawn from the bidding.
Shares of Oracle closed down 16 cents, or 1.3%, to $12.49, while SAP finished down 37 cents, or 0.9%, to $39.31. Retek was off 25 cents, or 2.2%, to $11.21.
Motorola
(MOT)
shares were higher after Bank of America raised its investment rating to buy from hold and upped its price target to $20 from $18. The brokerage cited exaggerated concerns about the company's handset business and forecast a strong first quarter at the technology outfit. The stock closed up 8 cents, or 0.5%, to $14.99.
General Mills
(GIS) - Get Report
reported third-quarter adjusted earnings that beat analysts' estimates but warned that full-year results could suffer if it can't balance realized prices with unit volume in its U.S. retail operations. The company earned 74 cents a share before items in the third quarter, compared with the Thomson First Call consensus of 70 cents a share. The stock ended down $2.10, or 4%, to $49.42.
Union Pacific
(UNP) - Get Report
said first-quarter earnings will be 43 cents to 48 cents a share, up from the previous guidance of 25 cents to 35 cents a share. Wall Street was looking for earnings of 35 cents a share. The stock closed up $3.28, or 4.9%, to $69.35.
Alcoa
(AA) - Get Report
said that it will cut 2,000 jobs over the next 12 months as it streamlines its operations as part of its new global business structure. The company also announced that it has agreed to sell its 46.5% stake in Elkem ASA, a Norwegian metals and energy group. The stock closed down 50 cents, or 1.6%, to $30.96.
Steel Tech
(STTX)
said it expects to earn $1.08 a share on sales of $280 million for the second quarter, compared to Wall Street's forecast of 92 cents a share. The stock finished up $1.41, or 5.6%, to $26.58.
Overseas markets finished in positve territory, with London's FTSE 100 up 0.08% to 4937 and Germany's Xetra DAX gaining 0.57% to 4320. In Asia, Japan's Nikkei fell 0.3% overnight to 11,842, while Hong Kong's Hang lost 0.4% to 13,776.