Gloomy Outlooks Swat Stocks

Updated from 4:05 p.m. EDT

Stocks managed to climb off their lows Thursday but still suffered deep losses as higher oil prices, lackluster economic news, a slew of earnings warnings and a downgrade of Yahoo! ( YHOO) put investors on edge before the release of the government's monthly employment report.

The Dow Jones Industrial Average closed down 101.25 points, or 0.97%, to 10,334.23, while the S&P 500 sank 12.32 points, or 1.08%, to 1128.52 and the Nasdaq Composite lost 32.24 points, or 1.57%, to 2015.55. The 10-year Treasury note traded up 4/32 in price to yield 4.56%, while the dollar was lower against the yen and higher vs. the euro.

Volume was moderate, approaching 1.5 billion shares on the New York Stock Exchange, where decliners outnumbered advancers by about 5 to 4. On the Nasdaq, over 1.7 billion shares changed hands, and decliners held close to a 2-to-1 majority.

John Carey, portfolio manager at Pioneer Investments, said today's declines stemmed from a confluence of negative news hitting the wires throughout the day. "There was no one terrible event today that got people retreating," he said. "It was a combination of timing, with end-of-quarter reallocations and the prospect of a long weekend keeping people on the sidelines, and then there were a variety of other stories that got people concerned today with nothing really positive to give them a counter-balance."

Spiking oil prices took a toll on the markets, with Nymex crude for August delivery closing up $1.69 at $38.74 a barrel. And Yahoo! weighed heavily on the Nasdaq after the internet giant was downgraded by Smith Barney based on valuation, sending the stock down $2.14, or 5.9%, to $34.26.

In addition, the tech index was buffeted by earnings jitters sown by preannouncements in several second-tier sectors. Software integration shop Iona ( IONA) fell 46 cents, or 11.3%, to $3.62 after forecasting a wider-than-expected second-quarter loss. Contract manufacturer Amkor ( AMKR) plunged $2.39, or 29.2%, to $5.79 after saying it's selling too few high-end semiconductor assemblies. And network hardware company Emulex ( ELX) lost $2.89, or 20.2%, to $11.42 after taking guidance down for two quarters on weak OEM sales.

The Philadelphia Semiconductor Index was down 3.7% and the Amex Network Index fell 4%. All but three of the 30 Dow components were in the red, with General Motors ( GM) leading the way, down $1.21, or 2.6%, to $45.38, and Hewlett-Packard ( HPQ) close behind, down 52 cents, or 2.5%, to $20.58.

"I think this is still a decent market for the next couple of years because earnings are strong and the economy is growing," Carey said. "Interest rates are obviously going to be a headwind now rather than the tailwind that they've been for the last several years. The biggest risk is if rates have to go up faster than people anticipate -- if inflation proves to be a bigger problem and the Fed has to be more aggressive."

Larry Wachtel, senior market analyst at Wachovia Securities, said the session's action shows that nothing has really changed after the handover in Iraq and the Fed's decision -- two events that were widely touted as watershed events for the market.

"The lesson here is that there was never a magic bullet," said Wachtel. "There was no specific point in time that would take us out of this recent sluggishness. People aren't just going to jump back into stocks. They have no reason."

Stocks had generally been steady since the FOMC raised its key interest rate by 25 basis points to 1.25% Wednesday afternoon. The central bank signaled no major change in policy, pledging to keep the pace of tightening "measured" and noting that some of the inflation pressure in the economy is due to "transitory" effects. Fed funds futures markets continue to see a series of quarter-point rate hikes through the end of 2004, when the official rate should stand at 1.75% to 2%.

Through the first half of 2004, the broader stock market was flat, with a 0.4% decline on the Dow and a 1.6% gain on the Nasdaq. Among sectors, energy stocks were the first half's top performers, up 12.3% collectively. Industrials followed, up 6.5%, ahead of consumer staples, up 5.3%. The worst-performing sector of 2004 was information technology, down 0.5%. Within that category, Internet software and services stocks gained 49% and Internet retailers were up 42.2%, while semiconductors lost 10.5%.

The next major milestone for Wall Street comes at 8:30 a.m. EDT on Friday morning when the government will release its monthly employment report. Forecasters estimate that the economy added 250,000 nonfarm jobs in June, and the unemployment rate held steady at 5.6%. Hourly earnings are expected to have increased 0.3%, the same rate logged in May, and the average work week is expected to remain unchanged at 33.8 hours.

"We're trading lower here on anticipation of tomorrow's employment numbers coming before this long weekend," said Peter Cardillo, chief market analyst with S.W. Bach & Co. "A very strong number out tomorrow could put people on edge, because the big question out there now is whether the Fed will be forced to be more aggressive in August."

In a prelude to that report, the Labor Department said Thursday morning that initial jobless claims rose by 1,000 to 351,000 in the week ended June 27. The previous week's tally was revised up by 1,000 to 350,000.

Also on the economic front, the Institute for Supply Management said its manufacturing index dipped slightly more than expected in June at 51.1, below Wall Street's consensus estimate of 61.5. The index stood at 62.8 in May.

Separately, the government said construction spending came in slower than expected in May, increasing by 0.3% compared to the consensus estimate of 0.7% and the previous month's revised 1.2%.

Automakers reported mixed results for June. DaimlerChrysler ( DAX) said its U.S. sales rose 4.9% over the same month last year, helped by one additional day of business and growth in Mercedes-Benz sales. Meanwhile, Ford Motor ( F) said June sales fell 7.7%, and sales at General Motors were down 15%.

Emulex rival QLogic ( QLGC), which affirmed its own earnings forecast late Wednesday, was down in sympathy with Emulex, falling 37 cents, or 1.4%, to $26.22.

Elsewhere, Boeing ( BA) dropped $1.20, or 2.3%, to $49.89 after being downgraded by Merrill Lynch. The firm said Boeing's share price is too expensive to justify a higher rating given the uncertain demand for airline and defense modernization.

Another big loser was Cardinal Health ( CAH), which warned after the bell Wednesday that fourth-quarter earnings would trail estimates and that it has received an SEC subpoena in an investigation of its accounting. Cardinal expects to earn 93 cents to 95 cents a share in the period, below the consensus forecast of $1.03 a share. Meanwhile, the SEC is asking the company for documents about how it classifies revenue in its drug distribution arm. Cardinal also said the U.S. attorney's office in southern New York has begun its own probe of the company's revenue accounting. Cardinal's shares closed down $17.19, or 24.5%, to $52.86.

At 10 a.m. EDT on Friday, the Census Bureau is expected to report that factory orders declined 0.7% in May, an improvement over the 1.7% drop reported for April.

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