Updated from 4:05 p.m. EDTBlue-chip stocks skidded again Thursday as higher oil prices weighed on sentiment with investors growing increasingly concerned about the outlook for corporate profits. The Dow lost 70 points, or 0.7%, to close at a four-week low of 10,038, while the S&P 500 shed 5 points to 1108. The Nasdaq, however, closed a fraction higher at 1886, after a nearly 2% slide yesterday. Volume was relatively light; at the New York Stock Exchange 1.3 billion shares were traded, while on the Nasdaq, 1.4 billion shares changed hands; both saw decliners lead advancers trail decliners 5 to 4. Oil prices were higher but well off session highs, despite news that the federal government is considering the opening of the strategic petroleum reserve to compensate for short-term supply disruptions because of Hurricane Ivan. On Wednesday, inventory reports sparked a 3.5% rally, the fifth winning session in a row. Nymex crude settled up 11 cents, or 0.2%, at $48.46, near its record close of $48.70 set on consecutive days in mid-August. However, Robert Pavlik, portfolio manager at Oaktree Asset Management, believes that investors in general have started to look past oil prices to the early tricklings of earnings season. "I think the reporting season is a little bit worse that what people had been expecting going into the quarter; the announcement from something like Colgate ( CL) probably set the market more on edge, because that was supposed to be more of a safe haven." The 10-year Treasury note was down 12/32 to yield 4.02%, after price gains earlier in the session pushed the yield down below 4% and a near six-month low. Some analysts say the low yield reflects the Fed's favorable outlook earlier this week on inflation. But that view is not universal. "I think the bond market is conveying a message that they think interest rates are going to remain relatively stable, probably expecting another rate increase in November, and that'll probably be it for the year," said Pavlik, adding that the Fed will probably take a "wait and see approach" after November.
Barry Hyman, equity market strategist at Ehrenkrantz King Nussbaum, disagreed. "I'm not accepting the lowered inflation aspect of why rates are going down," said Hyman. The bond market "has been a good leading indicator of future economic growth, and at this point, it is telling us we are in a decelerating economic and earnings environment -- not dramatic deceleration, but deceleration nonetheless," he said. Hyman said companies are missing earnings forecasts "at a greater level than they have in over a year," but more troubling is what companies are saying. "The commentary is: Raw materials, commodity prices, are rising, therefore our bottom line is suffering," said Hyman. "That's a new one, and that's a concern. And as a result, one of two things will happen. Either earnings will deteriorate or costs will be passed along." However, Pavlik sees passing costs on to consumers as less likely, because "you have the competition from overseas markets that will prevent that from occurring." With rates so low and inflation rising, Federal Reserve officials saw the need in coming quarters for a "significant" amount of rate hikes, according to a summary of the FOMC's Aug. 10 meeting released Thursday. "Given the current quite low level of short-term rates, especially when judged against the recent level of inflation, members noted that significant cumulative policy tightening likely would be needed to foster conditions consistent with the FOMC's objectives for price stability and sustainable economic growth," the summary said. In general, FOMC members were upbeat about the economy's future prospects, agreeing that the slowdown in the second quarter would be "short-lived" and the weak labor market would improve. "One of the things that stands out from the Fed minutes is that the policy makers saw the need for 'significant cumulative tightening.' That phraseology has taken some of the steam out of the bond rally today," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. Sheldon said that the minutes suggest that the Fed is likely to continue to raise rates "possibly higher than some investors had forecast." He added, "I think there's a general feeling after reading the minutes that the Federal Reserve bank feels a little bit better about the economy and is probably not as hesitant as some had thought to continue to raise rates." Deutsche Bank Securities downgraded the oil sector Thursday, specifically lowering ExxonMobil ( XOM - Get Report) to a hold from buy. ExxonMobil led the Dow's decline. Citigroup ( C) and Caterpillar, both down over 1%, were other notable members of the average.
Higher oil prices also weighed heavily on the airline sector with Delta ( DAL - Get Report) down nearly 3% and Continental ( CAL) off more than 4.5%. On the economic front, the Labor Department said jobless claims for the week ended Sept. 18 rose by 14,000 to 350,000 from a revised 333,000 in the prior week. Analysts had expected a tiny increase. Resiliency in the tech sector was reflected in the Philadelphia Semiconductor index, which was up 1%. Shares in Teradyne ( TER) and Broadcom ( BRCM) were both up roughly 2%. Also, the government said that the leading economic indicators index for August fell by 0.3% after falling by the same amount a month earlier. Consensus called for a 0.2% decline. In earnings news, utility company Entergy ( ETR - Get Report) warned that weather-related events forced it to lower earnings expectations for the third quarter. The company said it expects earnings to be down about 15% from the $1.57 a share it earned last year. Steelcase ( SCS - Get Report) posted lower year-over-year earnings while beating analysts estimates. The office furniture maker posted earnings of $7.3 million, or 5 cents a share, down from $18.1 million, or 12 cents a share, in the same period last year. Analysts had expected EPS of a penny. Alliant Tech Systems ( ATK) said Thursday that it expects 2005 earnings of $3.90 to $4 a share, up from their original estimate. The defense company also announced that it completed the acquisition of the PSI Group. Shares ended up $1.76, or 3.1%, to $58.22. Andrew Corp. ( ANDW) said it expected fourth-quarter losses after the company previous guided earnings between 4 and 7 cents a share. The company now expects losses of 4 to 8 cents a share. Analysts surveyed by Thomson First Call expected earnings of 12 cents a share. Andrew's stock closed 75 cents, or 6.7%, higher to $11.97. Overseas markets were mostly lower, with London's FTSE 100 down 0.5% to 4568.30 and Germany's Xetra DAX ending lower 0.9% at 3905.66. In Asia, Japan's Nikkei fell 0.6% to 11,019, while Hong Kong's Hang Seng rose 0.1% to 13,280.