Stocks Slump as War Rally Fades

After wavering in early trading amid optimism about the war, shares end lower.
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Updated from 4:08 p.m. EDT

Stocks closed at the day's lows on Wednesday, as hopes that the war in Iraq will soon end were offset by fears of economic sluggishness.

After jumping 90 points early in the day, the

Dow Jones Industrial Average

ended down 100 points, or 1.2%, at 8197, while the

Nasdaq

dropped 26 points, or 1.9%, to 1356. The

S&P 500

lost 12 points, or 1.4%, to 865.

The war news, which included televised images of coalition troops maintaining positions in downtown Baghdad and Iraqi residents celebrating, initially sent oil prices below $28 a barrel. But prices later spiked after the Pentagon said oil fields in northern Iraq might be wired for destruction. Nymex crude ended at $28.85, up 85 cents.

Stocks moved to session highs in early trading amid media reports that Saddam Hussein had taken refuge in a Russian Embassy, but slid after the Pentagon denied the report at midday. Also, an audio tape in which Osama bin Laden reportedly encourages Muslims to commit terrorist acts left investors uneasy.

"There was good news out today and yesterday and Monday. Two or three days of good news on the war front, but the market is sideways. People are looking forward to earnings, with Yahoo! tonight and General Electric in a few days," said Giri Cherukuri, head trader at OakBrook Investments. "I think people concluded that the U.S. wins the war, but people are looking toward what the future of Iraq is going to be. How much money will it cost to rebuild the country?"

Indeed, investors appeared this week to be keeping a closer eye on fundamentals and technical levels instead of war sentiment. On Monday, markets approached key technical levels on the Dow, Nasdaq and S&P, only to end up closing below their 200-day moving averages. On Tuesday, markets were essentially flat, leading to speculation that the war rally was ending.

While Cherukuri said he doesn't think the war rally is completely over, he said it could be on its last legs, with markets treading water until another catalyst surfaces.

In economic news, April's Blue Chip survey showed that economists expect the U.S. gross domestic product to grow 2.4% in 2003, compared with last month's forecast of 2.6%.

On the corporate front, a research report from Deutsche Securities said that

Cisco Systems

(CSCO) - Get Report

might have trouble meeting revenue expectations. Cisco stock was down 2.9% to $13.04

Drugmaker

Abbot Laboratories'

(ABT) - Get Report

first-quarter profit was in line with analysts' estimates. The company also affirmed its 2003 earnings forecast but said second-quarter profit could fall slightly below estimates. Abbot was up 0.8% to $40.23

Sabre Holdings

(TSG) - Get Report

, owner of Travelocity.com, said late Tuesday that it would post first-quarter earnings below estimates because of the war in Iraq. This is the second warning in less than a month. Still, Sabre was up 6% to $17.03.

MDC Holdings

(MDC) - Get Report

posted first-quarter earnings that topped Wall Street estimates. Shares were up 0.6% to $41.98. Rival

Hovnanian Enterprises

(HOV) - Get Report

said fiscal 2003 earnings would be better than $5.50 a share, while analysts expect the company to earn $5.74 a share. Also, Hovnanian said it snapped up Ohio builder Summitt Homes. Its shares were up 0.5% to $37.70.

Fox Entertainment

(FOX) - Get Report

shares were down 2.2% to $27.25, even though Goldman Sachs raised its earnings estimates above the current Wall Street consensus.

Elsewhere, Goldman Sachs upgraded

PepsiCo

(PEP) - Get Report

to outperform, while downgrading

Anheuser-Busch

(BUD) - Get Report

to underperform. Pepsi was up 0.4% to $39.39, while Bud was down 3.5% to $46.45.

Dun & Bradstreet

(DNB)

said first-quarter earnings would come in at 51 cents a share, excluding a 3-cent charge, and would miss Wall Street estimates. Shares were down 12.3% to $34.60.

DaimlerChrysler

(DCX)

said 2003 earnings targets are becoming harder to reach, although the company didn't adjust current estimates. Shares were up 1.1% to $32.74.

Among software companies,

Phoenix Technology

(PTEC)

warned that its second-quarter loss would come in at 4 cents a share, worse than the break-even expected by Wall Street. Meanwhile,

Borland

(BORL)

said its first-quarter loss would be between 1 and 3 cents a share, worse than the 3-cent gain expected by Wall Street. Phoenix shares were down 4% to $4.60, while Borland was down 7.5% to $8.48.

Meanwhile, 70 travel agencies are suing

AMR

(AMR)

, parent of American Airlines, and

UAL

(UAL) - Get Report

, United Airlines' parent, along with 19 other airlines worldwide. They claim the airlines colluded to determine prices and eliminate competition. The Amex airline index was off 0.9% on the news.

Amid companies due to report earnings Wednesday,

Genentech

(DNA)

is expected to increase its first-quarter profit to 28 cents a share from 22 cents a year earlier, analysts said. Genentech shares were down 0.9% to $36.42.

Yahoo!

(YHOO)

is expected to post a profit of 6 cents a share for the first quarter, compared with 2 cents per share the previous year, analysts said. Results are due after the closing bell. Ahead of the release, Yahoo! shares were down 4% to $22.87 and were pressuring rival

Amazon.com

(AMZN) - Get Report

, which was off 5.5% to $25.06.

Shares of

Federated Investors

(FII) - Get Report

will be added to the Standard & Poor's 500 Index, while

Pharmacia's

(PHA)

stock will be dropped. Federated was up 4.8% to $27.40, while Pharmacia was down 1.4% to $44.33.

Overseas stock markets were down, with London's FTSE 100 closing off 0.2% at 3861 and Germany's Xetra DAX ending off 1.2% at 2734. Japan's Nikkei ended 0.9% lower at 8057, while Hong Kong's Hang Seng closed down 2% at 8636.