Market Update: Stocks Close Down After Fed Says Recession Risks Loom

After a morning in the green, the Nasdaq closed at a new low for the year, while the Dow ended solidly in the red.
Author:
Publish date:

(Updated from 3:49 p.m. EST)

The

Federal Reserve did not hike rates when its latest meeting concluded this afternoon. But a rate cut is increasingly likely, even as early as January, now that the Fed says the risk of recession outweighs the risk of inflation.

And the markets reacted to the news quite strongly. The

Dow Jones Industrial Average fell from triple-digit gains to a loss of 61.05, ending the day at 10,584.37. The

Nasdaq Composite Index, which had been up modestly before the announcement, closed down 113.4 to 2511.1, a new 52-week low.

When the results of the

Federal Open Market Committee meeting were first released at 2:15 p.m. EST, Wall Street didn't know what to make of the results -- or even what the results were.

CNBC

initially said the Fed had not changed its outlook on the economy when, in fact, it had moved away from thinking inflation was the greatest risk toward viewing recession as the biggest concern.

The Nasdaq took a massive beating in the last two hours of trading. Think of the Comp, as the Nasdaq is known, as a three-legged stool, comprised of biotechnology, semiconductors and telecommunications.

For much of the day, the Comp had gains, standing on two legs -- biotechs and chips. But, as the Fed news circulated through tech stocks like chickenpox in a nursery school, the Nasdaq found itself without a leg to stand on.

The

Philadelphia Stock Exchange Semiconductor Index

, was earlier gaining strength from news that

Advanced Micro Devices'

(AMD) - Get Report

three-year supply contract with

Cisco

(CSCO) - Get Report

would be doubling the company's output. But all that changed. The SOX, as the chipmaker index is informally known, closed down 0.9%.

The American Stock Exchange Biotechnology Index was also far lower.

Meanwhile, that which was worse got progressively so. Telecommunications, dot-coms and large-cap technology all sank as the closing bell approached.

On the Dow, old-tech names

Hewlett-Packard

(HWP)

and

Intel

(INTC) - Get Report

powered out gains, however.

International Paper

(IP) - Get Report

and

Coca-Cola

(KO) - Get Report

were higher, too. IP's gain came despite last night's earnings warning from

Mead

.

Lehman Brothers

helped raise the sector's profile in a positive way, initiating coverage on five paper companies, starting them all at buy. As a result, the

Philadelphia Stock Exchange Forest & Paper Products Index

rose 1.9%. Coke was it, gaining for a second day, still feeling the goodwill after

Goldman Sachs

reiterated its rating on the company yesterday.

Back to top

Sector Watch

Overall, drillers and oil service stocks have had a pretty good year. But, since hitting a better-than-two year high in September, these guys have fallen from grace. The

Philadelphia Stock Exchange Oil Service Index

, which closely tracks the industry, had fallen 31% from Sept. 12's peak to its close on Nov. 30. It closed up 2.2%.

In the past few weeks, the drillers have been rebounding mightily, and that trend continued today after a pair of

Lehman Brothers

analysts issued a bullish joint call on the sector. In a note to investors this morning, James Crandell and Angeline Sedita said that spending in exploration and production, which is conveniently shortened to E&P hereafter, is set to increase 19.1% in 2001 vs. the same period in 2000.

That's a good thing for the drillers and oil service stocks that depend on this spending for income.

Lehman's top oil service picks include

Schlumberger

(SLB) - Get Report

,

Weatherford

(WFT) - Get Report

,

Grant Prideco

(GRP)

and

BJ Services

(BJS)

. Its picks for drillers:

Transocean Sedco Forex

(RIG) - Get Report

,

Ensco International

(ESV)

,

Nabors Industries

(NBR) - Get Report

,

Santa Fe International

(SDC) - Get Report

and

Rowan

(RDC)

.

Back to top

Bonds/Economy

Treasury prices are down after the

Federal Open Market Committee said the risks of recession outweigh the risks of inflation, moving it closer to cutting rates in the near future.

The benchmark 10-year

Treasury note closed down 5/32 at 104 5/32, yielding 5.196%.

In economic news, the

international trade

(

definition |

chart |

source

) report showed that the trade deficit narrowed to $33.2 billion in October from $33.7 billion in September. Imports and exports both fell.

The

BTM-UBSW Weekly Chain Store Sales Index

(

definition |

chart ) fell 0.6%, its third consecutive decline. The

Redbook Retail Average

(

definition |

chart ) found December sales running 0.2% behind November after three weeks, widely missing the target of a 1% gain. These numbers indicate that consumer spending is slowing.

Back to top