Stocks Stomped by Fed Fallout, Spain Worries

NEW YORK (TheStreet) -- U.S. stocks were stomped Wednesday, weighed down by diminished hopes for additional stimulus from the Federal Reserve and the prospect of more debt problems surfacing in Europe.

The sell-off extended Tuesday's losses, getting the second quarter off to a rough start after a stellar beginning to the year. On Wednesday, a poor Spanish debt auction rekindled concerns about the health of the eurozone, adding to Wall Street's worries after the minutes of the latest Fed meeting, released on Tuesday, put a dent in expectations the central bank had another round of quantitative easing up its sleeve.

The Dow Jones Industrial Average dropped 125 points, or 1%, to close at 13,075. The blue-chip index ranged as low as 13,021 earlier in the session.

Breadth within the Dow was overwhelmingly negative with 26 of the index's 30 components finishing lower. The biggest percentage losers among the blue chips were Alcoa ( AA), Bank of America ( BAC), Cisco ( CSCO), JPMorgan Chase ( JPM) and Microsoft ( MSFT); all of which lost at least 2%.

AT&T ( T), Caterpillar ( CAT), Merck ( MRK) and Procter & Gamble ( PG) were the only blue-chip stocks that finished in the green.

The S&P 500 shed 14.4 points, or 1%, to finish at 1399, closing below 1400 for the first time since March 23. The Nasdaq took the worst hit of all, sinking 45.4 points, or 1.5%, to settle at 3068.

Quincy Krosby, a market strategist for Prudential Financial, says it's very normal for stocks to start pulling back after such a strong run-up while waiting for the next catalyst.

"The market needed a reason to pullback and took advantage of worries about the Spanish economy and Spanish debt and Fed minutes," Krosby said.

"Despite the headline-grabbing nature of Spanish debt, it's still very much contained in Europe," she said, adding that she believes the market's weakness following the latest Fed minutes has been a knee-jerk reaction by traders, rather than long-term investors.

The next real driver for the market, says Krosby, is first-quarter earnings season, which kicks into gear next week. Krosby cautions that top-line revenue growth could be challenged, and investors are going to be looking critically at margins and corporate guidance at a time when Europe is weak and China is in the midst of a slowdown.

The strategist will also want to see if Friday's nonfarm payrolls report points to an expanding work week, which would help clarify whether the economy is improving and demands more workers.

From a big-picture perspective, Krosby believes stock market can do "very well" with modest growth of 1.5%-2% in gross domestic product.

U.S. stocks tumbled Tuesday after the Federal Reserve downplayed the prospects for more quantitative easing. Tuesday's Fed minutes struck a measured tone about the prospect of more bond buying with the central bank saying it was "prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability."

Spain's disappointing debt auction on Wednesday was a reminder that the country could be next in line for a bailout as global investors showed they were not yet prepared to hold Spanish debt without a higher risk premium.

The auction for three-, four-, and eight-year bonds raised €2.6 billion, coming in at the lower end of the €2.5 billion to €3.5 billion range targeted. Shortly after the sale, Spain's 10-year benchmark bond yield rose to 5.6% from 5.45% Tuesday. Italian yields were rising in sympathy while the euro-dollar was driven to fresh lows at $1.31 on the auction results.

The European Central Bank left its benchmark interest rate unchanged at a record low of 1% Wednesday, as expected, as credit conditions in the single currency bloc remain strained and the economy there flirts with recession.

London's FTSE closed 2.3% in the red despite a much better-than-expected March services purchasing managers index reading of 55.3. Germany's DAX retracted 2.8%. In Asia, Japan's Nikkei Average dropped 2.3% and Hong Kong's Hang Seng index finished up 1.3%.

Meantime, U.S. economic data was just so-so. The Automatic Data Processing employment change report indicated that private sector employment rose 209,000 in March, roughly in line with market expectations but down from an upwardly revised by 14,000 to 230,000 in February. The report is a precursor to Friday's nonfarm payrolls data from the federal government. Economists expect 200,000 private-sector jobs were added in March.

Employment in the private, service-providing sector increased 164,000 in March, after rising a revised 183,000 in February. Employment in the private, goods-producing sector rose 45,000 in March. The manufacturing sector added 23,000 jobs.

Also, the Institute for Supply Management said the U.S. services index fell to 56 in March, a reading that was below the consensus view of 56.7, as well as the February reading of 57.3. Still, any reading above 50 indicates expansion in the services sector.

In corporate news, General Electric's ( GE) credit rating was downgraded a notch by Moody's because the agency said it sees risks associated with the funding model of GE's lending unit, General Electric Capital Corp.

GE was cut to Aa3 from Aa2. GE Capital's rating was cut by two notches to A1 from Aa2. Moody's said because GE Capital is so big, it must rely on funding from financial markets, which aren't reliable and where risks remain.

Shares of GE slipped 1.1% to $19.74.

JPMorgan Chase's decline stemmed from news the firm is being stung with a $20 million fine by the Commodity Futures Trading Commission as part of a settlement over charges the bank overextended credit to Lehman Bros. in the two years leading up to its bankruptcy in 2008. The stock gave up 2.2% to $44.41.

A warning from SanDisk ( SNDK) hurt the tech sector. After Tuesday's close, the flash memory company lowered revenue and gross margin expectations for its fiscal first quarter, citing "weaker than expected pricing and demand." The stock tanked 11% to close at $44.51.

IBM ( IBM) shares dipped 1.6% to $206.05 after shares of the hardware and software giant were downgraded by Bank of America Merrill Lynch to neutral from buy, citing limited valuation and near-term upside. The bank, however, raised IBM's price target to $215 from $205. IBM's shares had hit a new all-time high on Tuesday.

Meantime, AIG ( AIG) saw its shares surge more than 5% to $32.52, bucking the weakness in financials, after Bernstein analyst upgraded the stock to outperform with a price target of $45. Reports that the bailed-out insurer was nearing an IPO of its airline leasing unit was also buoying the stock.

The commodities markets also saw sharp moves as the prospect of additional QE seemed less likely. May oil futures slid $2.51 to settle at $104.09 a barrel, while June gold futures shed $57.9 to settle at $1,614.10 an ounce, provoked by strong dollar gains and perceptions of reduced opportunities for more U.S. monetary easing.

The benchmark 10-year Treasury note was rising 20/32, diluting the yield to 2.2%, while the U.S. dollar index was up 0.4% to $79.76.

-- Written by Andrea Tse and Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Andrea Tse.

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