Stocks Drop, Hurt by Worries Over U.S. and European Economies

NEW YORK (TheStreet) -- U.S. stocks fell Thursday as a troubling outlook for Europe's economy and signs of a slowdown in the U.S. spread pessimism.

The Dow Jones Industrial Average ended Thursday down 45.56 points, or 0.4%, to 12,898.26. The index traded in a tight range of 12,852 at its lowest and 12,961 at its highest.

The S&P 500 fell 6.44 points, or 0.5%, to 1,367.58. The Nasdaq ended Thursday flat at 2,976.12.

Holding the Nasdaq up were shares of tech heavyweight Apple ( AAPL), which ended the day up 1.8% to $609.94. There were reports that the company will soon be producing a new version of its iPad with a 7-inch screen.

Gainers and laggards on the New York Stock Exchange and Nasdaq were about even with a slight lean toward the negative on thin trading volumes.

In other tech news, Research In Motion ( RIMM) advanced 4.6% to $7.69 amid short covering, and Netflix ( NFLX) surged 13% to $81.72 after a BTIG analyst said the company's online audience surpassed that of cable and TV networks, and Netflix CEO Reed Hastings was upbeat about subscriber growth.

The sectors with the biggest losses Thursday were energy and financials. The only sector that closed up Thursday was consumer cyclical.

Of the 30 components on the Dow, 22 ended Thursday with losses, led by JPMorgan Chase ( JPM) and Bank of America ( BAC).

"The reason for the declines has more to do with Mario Draghi's declining opinion on the future of the European economy; also there's a sense of desperation in some of this activity today and I think investors are beginning to see this as ... getting to the last resort when it comes to using interest-rate cuts to solve their problems," said Jeffrey Sica, president at Sica Wealth Management.

He added: "It does get to a point when you start to see economic reports that don't improve significantly, but don't decline significantly enough to justify economic stimulus -- it leaves investors, first off, worried that there's not going to be enough liquidity to push prices up, and secondly, that we're going to be in this constant stalemate with a horrendous economy not improving ... and that stalemate is what people fear the most."

The European Central Bank on Thursday reduced interest rates to a record low as it tries to prevent the eurozone economy from worsening. The euro fell to a one-month low against the dollar after the report, and was down more than 1% at last check.

ECB President Mario Draghi said in a press conference after the release that risks to the continent's economic outlook are still to the downside amid "a renewed increase in the tensions in several euro-area financial markets and their potential spillover to the euro area's real economy."

The ECB's main refinancing rate will be cut by 25 basis points to 0.75%. The interest rate on the marginal lending facility will be decreased by 25 basis points to 1.5%, and the interest rate on the deposit facility will be decreased by 25 basis points to 0%.

Meanwhile, the Bank of England, in an effort to boost the U.K.'s sagging economy, announced it is raising its asset purchase target to 375 billion pounds, while maintaining its benchmark interest rate at 0.5%, and implying that more stimulus measures are possible in the future.

While it's been widely expected that China would cut interest rates again, the timing of the latest reduction was a surprise to the markets. The country's central bank reduced its one-year deposit rate 0.25 percentage point and one-year lending rate 0.31 percentage point.

The People's Bank of China is allowing banks to lend 30% below the lending rate floor.

"Since rates are already practically on the floor in the West, any further decline does not seem to move the needle much in terms of additional stimulus," an INTL FCStone report said. "In China, where rates have much further room to fall, the authorities face different kinds of problems, the first being the realization that Chinese borrowing demand will not necessarily be driven by interest rates alone, as borrowers will attach more importance to how confident they feel about the economic outlook."

Ahead of Friday's big nonfarm payrolls report, Automatic Data Processing reported that employment in the U.S. nonfarm private business sector increased by 176,000 in June from May on a seasonally adjusted basis, better than the addition of 105,000 jobs to the U.S. economy that economists were expecting. The estimated gain in May from April was revised up slightly to 136,000 from 133,000 initially.

Employment in the private, service-providing sector rose 160,000 in June, according to ADP.

Meantime, the Labor Department reported that initial jobless claims for the week ended June 30 fell 14,000 to 374,000 from the previous week's upwardly revised figure of 388,000. Economists, on average, expected a fall to 385,000.

The four-week moving average was 385,750, a decrease of 1,500 from the previous week's average of 387,250.

Continuing claims for the week ended June 23 was 3.306 million, an increase of 4,000 from the preceding week's level of 3.302 million.

The Institute for Supply Management reported that its June non-manufacturing index registered 52.1%, which is 1.6 percentage points lower than the 53.7% registered in May and indicating continued growth at a slower rate in the non-manufacturing sector. Economists on average were expecting the reading to come in at 53%.

Despite the slowing reflected by the ISM report as a whole, the employment index part of it increased by 1.5 percentage points.

"I think one thing the bulls have going for them this earnings season is the fact that expectations have gone down heading into the season, so there's a lower bar to overcome, which could be a plus," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research.

The FTSE in London finished up by 0.14% and the DAX in Germany closed lower by 0.45%. Hong Kong's Hang Seng Stock index finished up 0.5%. The Nikkei in Japan closed lower by 0.27%.

Spain on Thursday managed to sell €3 billion of bonds, satisfying its maximum target, though borrowing costs increased on two of the three bonds up for auction.

August crude oil futures were down 74 cents to $86.92 a barrel. August gold futures were slipping $17.30 to $1,604.50 an ounce.

The benchmark 10-year Treasury was up 5/32, diluting the yield to 1.604%, while the dollar was rising 0.74%, according to the dollar index.

In corporate news, sales at many of the top U.S. retailers were hurt in June by worries about the economy and the still high unemployment rate.

Costco ( COST), the warehouse retailer, said same-store sales in June rose 3%. Analysts were expecting same-store sales to rise 3.7%. Total sales for the month rose 6% to $9.18 billion from $8.69 billion a year earlier.

Shares ended Thursday down less than 0.5%.

Kohl's ( KSS), Target ( TGT) and Macy's ( M) also reported disappointing June same-store sales.

Still, Kohl's shares were jumping nearly 7% and Macy's was up more than 3%. Target was down 0.7%.

Walgreen ( WAG) and Rite Aid ( RAD) posted declines in same-store sales. However, Walgreen shares were up 1.3% while Rite Aid gave up more than 2%.

Lower-priced retailers such as TJX ( TJX) and Ross Stores ( ROST) posted a jump in sales and raised their quarterly earnings outlooks as consumers shopped for bargains on designer apparel and home products.

Ross Stores shares popped nearly 7%, and TJX climbed more than 3%.

"There were also some same-store sales numbers that looked pretty good, and we have the retail sector looking pretty strong on those numbers," said Salamone.

-- Written by Andrea Tse and Alexandra Zendrian in New York.

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

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