It was already hard enough, in and of itself, for investors to resist the temptation of cashing in some gains from Monday's rally. But the Street also had to deal with a disappointing outlook from Texas Instruments ( TXN), spiking oil and another drop in consumer confidence. Still, just prior to the close, stocks staged a comeback as investors bet again on tech ahead of earnings from Amazon.com ( AMZN). Given that
Amazon's shares plunged 8% after release of the report, all bets are off for Wednesday. On Tuesday, while major stock proxies remained underwater, they ended well above earlier lows. The Dow Jones Industrial Average finished down 7.13 points, or 0.07%, at 10,377.87. That was off a morning high of 10,411, but well above an earlier low of 10,316.88. An afternoon reversal in the shares of Intel ( INTC), which fell after TI's weak sales guidance, also helped the blue-chip average turn around in the afternoon. The S&P 500 fell 2.84 points, or 0.24%, to 1196.54. The S&P, which had traded as high as 1201 in morning trade, had dipped to an intraday low of 1189 in the afternoon, before bouncing back. The Nasdaq Composite dipped 6.38 points, or 0.3%, to 2109.45. The tech heavy index first fell to a low of 2094 in the afternoon under pressure from semiconductor issues. The Philadelphia Semiconductor Sector Index ended down 1% on the day, after losing 1.8% earlier. Investors didn't completely forget the reason for Monday's rally: the appointment of Ben Bernanke to replace Alan Greenspan as the next Fed chairman in 2006. But on Tuesday, the impact of the Bernanke appointment on other areas of the market, such as surging bond yields, took a chunk out of equity prices. It also undermined the dollar, thereby contributing to strength in the price of crude oil -- which gained $2.1 to $62.44 per barrel -- and of gold, which rose $7.7, or 1.7%, to $474.7.
The benchmark 10-year Treasury bond plunged 19/32 while its yield, which moves inversely, rose to 4.52%. Bonds were also hit by news that existing home sales were the second highest on record in September. Expectations that Bernanke may be less aggressive than Greenspan in hiking interest rates, as
noted here, have raised expectations that inflation may be less of an obsession next year. The prospect of a less aggressive Fed also pressured the dollar. The greenback was hit from different corners Tuesday. The euro shot higher overnight on news that business confidence had surged in Germany. Further weakness came for the dollar after news that U.S. consumer confidence, as measured by the Conference Board's index, fell to a two-year low of 85 in October, from 87.5 in September. The reading was also below Wall Street economists' forecast for the index to rise to 88. Confidence had already plunged in September following hurricane Katrina and Rita's devastation of the Gulf Coast and the spike in energy prices that followed. Lynn Franco, director of consumer research at the board, said that "the recent hurricanes, pump shock and a weakening labor market" weighed on consumers, who were also expecting "much higher home heating bills this winter." The report was largely ignored by equity investors at the open, given recent evidence of a rebound in consumer confidence in the weekly ABC/Washington Post surveys. But concerns ahead of the key end-of-year holiday-shopping season still undermine investors' confidence in the outlook for profits. What's worse, says Jack Ablin, market strategist at Harris Trust, is that even though markets expect Bernanke to be less hawkish than Greenspan, the Fed will most likely continue lifting rates according to plan until "something snaps" next year.
To be bullish nowadays would mean buying into the prospect of an early halt to rate hikes. But that could feed inflation -- and higher bond yields -- as seen in recent market action. Perhaps the best bet, in the meantime, might be into gold. Tom Hartmann, a gold analyst at Altavest, thinks bullion will likely move all the way to $500 an ounce by year end, and most likely to $530 within six months. Demand from Asia, especially India, is expected to accelerate until the end of the year, central bank holdings are also expected to increase; and then, there's the Bernanke-linked uncertainty that undermines the outlook for the dollar while boosting inflation expectations. "We've had all these factors that have snowballed into a pretty bullish case for gold," he says.