When it comes to communicating the Federal Reserve's thinking to the markets, Richard Fisher is starting to demonstrate a willingness to put it pretty plainly. About two hours remained in the trading day when the Dallas Fed president offered hawkish comments that spread through trading circles and appeared to spark a selloff that ended only when the closing bell rang. With his statement all but confirming that the Fed would keep lifting rates, stocks essentially lost any chance they had to take advantage of plunging crude oil prices. The Dow Jones Industrial Average treaded water for much of the session, but ended down 94.37 points, or 0.9%, to close at 10,441.11, with most of the loss coming after Fisher's speech. Exxon Mobil ( XOM) was the biggest loser on the Dow, falling 3.1%. Energy stocks were hit not only by sliding crude prices but by a profit warning from BP ( BP). The big oil company said hurricanes Rita and Katrina have hurt production and will cut into its profits. The S&P 500, which contains a number of energy companies, finished down 12.23 points, or 1%, at 1214.47. Even the tech-heavy Nasdaq Composite couldn't escape the downward trend, losing 16.07 points, or 0.8%, to 2139.36. Microsoft ( MSFT) fell on news that Google ( GOOG) and Sun Microsystems ( SUNW) will deliver a new product to competes with the software giant's Office and Outlook programs. Separately, a downgrade of Texas Instruments ( TXN) weighed on the chip sector. That the Fed is concerned about inflation and intends to continue raising rates should hardly be surprising to anyone anymore. But it could be that when the warning comes from Fisher -- the same fellow who said back in June that the Fed's rate-hike campaign was in its eighth inning -- people pay attention. Fisher, who refrained from baseball analogies this time, said that after creeping higher for a number of years, "the inflation rate is near the upper end of the Fed's tolerance zone, and shows little inclination to go in the other direction."
Despite the fact the comments didn't deviate from the Fed's view on inflation and interest rates, stock investors seized on the news as a reason to sell Tuesday. "There was no surprise there," Michael Malone, trading analyst at SG Cowen, said of Fisher's statements. "But the overall concern in the market is that rates are going up, and the consumer and companies are increasingly impacted by energy prices." Stocks had kept a slight positive bias for most of the morning and early afternoon, thanks to a slide in crude oil. The price of a barrel touched $63 before finishing with a loss of $1.57 at $63.90 on Nymex. Still, the market was unable to find real traction, especially as more evidence surfaced that soaring energy and commodity costs are biting into profits. Clorox ( CLX) lowered its earnings guidance because of higher energy prices. As a result, the maker of cleaning products said it would lift prices on 40% of its household products. Goodyear ( GT) also warned that higher costs will hit its third- and fourth-quarter results. As for Procter & Gamble ( pg), Citigroup went ahead and downgraded the stock, citing higher raw material costs. According to Richard Dickson, a strategist at Lowry's Research, the warnings are coming at a perfect time, because he says what the market needs is a good old correction. After the Fed raised interest rates on Sept. 20 and signaled more to come despite Hurricane Katrina, there was "somewhat of an attempt" at a correction in stocks, he says. But equities keep rallying back, including last week's move, making it impossible to find a "sustainable bottom" from which to rebound, Dickson says. The strategist believes a bottom eventually will be found around mid-October, possibly after Wall Street digests a number of earnings warnings from companies being punished by soaring energy and raw material costs.
"Oil could head lower or even stabilize in the low $60s, which would be good enough for the market to rally," Dickson says. "So, by mid-October we're looking for a sustainable bottom and then we would jump in for a fourth-quarter rally." The move could be accentuated as hedge funds and other large speculators leave the crowded oil arena for other bets, such as the technology sector. Tech issues have traditionally performed well in the fourth quarter. A lot will depend, of course, on what investors make of the post-Katrina and Rita economic and profit outlook.