Celebration about the durable goods number morphed into consternation about the weaker-than-expected consumer confidence report today, leading to a migration out of stocks. The Dow Jones Industrial Average closed down 1.1% to 8824.41 after having traded as high as 9017.02 and as low as 8782.03. The S&P 500 shed 1.4% to 934.82 after trading as high as 955.82 and as low as 930.36. The Nasdaq Composite ended down 3.2% to 1347.78, just above its session lows and well off its early high of 1396.40. Declining stocks led advancers 19 to 12. In Big Board trading, where 1.23 billion shares were exchanged, down 22% from the three-month average, according to Bloomberg. Losers bested winners by more than 2 to 1 in over-the-counter activity, where 1.35 billion shares traded. The losses led some technicians to declare the "uptrend lines" from the July lows at about 935 for the S&P and 8785 for the Dow had been broken. Whether today will prove to be just a marginal break of those trendlines, and thus a false indicator of more weakness to come, remains to be seen. But clearly there was disappointment in how the session ended as a final-hour rally attempt failed, in stark contrast to recent trends.
Not So Durable
Early gains followed the government report that orders for durable goods rose a stunning 8.7% in July vs. a consensus estimate for a gain of 1.4% and compared with a 4.5% decline in June (revised down from a drop of 4.1% originally). Excluding transportation, orders rose 3.9% last month, matching the decline in June. Capital goods orders, excluding defense, jumped 13.5% last month, indicating an improvement in corporate spending after a decline of 9.6% in June. Excluding defense and aircraft, capital goods still rose a solid 8.1% vs. a fall of 6.3% in June. When the weak durable goods report for June was released on July 25 , many observers dismissed it, citing the number's "notorious volatility." Not to be picky, but I didn't hear similar comments this morning. More often, the quite-strong July report was cited as "proof" the double-dip dragon had been slain. But "volatility is a way of life for durable goods orders," said John Silvia, chief economist at Wachovia Securities. To account for this, he cited the lack of leading releases to help economists predict the durable goods report, the "lumpy" nature of orders for aircraft and defense goods, and "seasonal-adjustment problems." For the past three months, durable goods orders excluding transportation were up 5.9%, but they are down 3.5% on a year-over-year basis, Silvia observed. "Momentum is on the upside, but we continue to walk that line between boom and double dip," he concluded, expressing a centrist view that runs counter to the current penchant of many to see things only in extremes. That is, we shouldn't get too excited over today's strong data, just as we shouldn't have been overly depressed by the June weakness. But of course, financial markets have a way of reacting dramatically to daily events. Even if the economic data merely proved an excuse for what would have occurred anyway, it sure looked as if the data dictated market action. Equities rallied early following the preopening release of the durable goods report while Treasuries slumped amid speculation the strong data might reduce the likelihood of a Federal Reserve rate cut. Then came the 10 a.m. EDT release of the Conference Board's consumer confidence report for August, which showed an unexpectedly large decline to 93.5, a nine-month low and vs. 97.4 in July (raised from 97.1 previously). The consumer confidence data redoubled concerns about consumer spending, sparked earlier by a Merrill Lynch downgrade of several retailers, including Dollar Tree ( DLTR) and Nordstrom ( JWN), to sell. The S&P Retail Index fell nearly 2%. The data also weighed on the Dollar Index, which closed down 1.06 to 106.89 while gold prices rose 0.9% to $313.90 per ounce. Among other macro developments, the Congressional Budget Office confirmed its estimate of the fiscal deficit to $157 billion for the fiscal year ending Sept. 30, and forecast a $145 billion deficit for fiscal 2003. The government's budget won't return to a surplus until 2006, the CBO said, slashing its forecast for the cumulative surplus for 2002 to 2011 to $336 billion from $1.7 trillion in March, and more than $5.6 trillion last year. That helped restrain Treasuries from benefiting more from the weakness in stocks. The benchmark 10-year note ended down 15/32 to 100 24/32, its yield rising to 4.28%. "The CBO's budget balance forecasts still strike us as far too optimistic," Goldman Sachs economist John Youngdahl commented, expressing a concern shared by many bond traders. "We still do not foresee a return to surpluses anytime this decade. In fact, we recently adopted even larger fiscal deficit assumptions for the next several years, owing to weaker current economic conditions and a reduced estimate for productivity and potential GDP growth trends."
Tech stocks also reacted to some cautious comments by Intel ( INTC) CEO Craig Barrett, who said "companies are not investing" in computer equipment and that he was not confident the holiday season would provide a boon to the PC industry this year. Intel fell 5.2%, dragging the Philadelphia Stock Exchange Semiconductor Index down 5.9%. Barrett's comments helped drag down shares of Microsoft ( MSFT), which fell 2.4%, as well as Hewlett-Packard ( HPQ), which shed 4.3%. (After the closing bell, Hewlett posted a net loss of $2 billion, or 67 cents per share on a GAAP basis, and pro forma earnings of 14 cents a share, in line with consensus estimates, although sales of $16.5 billion were slightly below expectations.) Additionally, HealthSouth ( HRC) fell 43.9% after reducing its earnings guidance and announcing plans to spin off its surgery care unit; the firm cited government reimbursement changes for both developments. Separately, Toll Brothers ( TOL) lost 3.6%; the homebuilder posted better-than-expected third-quarter earnings of 70 cents per share, but that was down 10% from year-ago levels as its revenue fell 1%. The S&P Homebuilding Index fell 2.4%.
As stocks slipped today, the CBOE Market Volatility Index rose 1.4% to 32.73. Still, the VIX is noticeably lower than its recent peak of 56.74 on July 24. As alluded to yesterday, the VIX's recent slide has sparked a debate about its meaning or lack thereof. Once again that story will have to wait until tomorrow.