April 26, 2024

Worst Day for Markets in Two Months as Signals Are Mixed

The stock market was pummeled on Thursday after two big companies issued grim sales forecasts and economic data added to investors’ concerns that the Federal Reserve would soon start winding down its economic stimulus program.

The Dow Jones industrial average fell more than 225 points, its worst day in nearly two months. Investors also sold off bonds, driving the yield on the 10-year Treasury note to its highest level in more than two years.

Before the start of trading, Wal-Mart Stores cut its estimates for annual revenue and profit, warning that cautious shoppers are spending less. The news followed a disappointing revenue forecast from Cisco Systems late on Wednesday.

In a twist, more signs of resilience in the nation’s economy weighed on the stock market. Reports on inflation and the job market appeared to raise the odds that the Fed would begin winding down its $85 billion monthly program of buying Treasury and mortgage-backed securities as early as next month. Many investors think that the Fed’s effort to keep interest rates extremely low has underpinned the stock market’s record run.

“People are worried that this move up in interest rates will kill the recovery, and we won’t see the anticipated second-half improvement in growth and corporate earnings,” said Alec Young, global equity strategist at S. P. Capital IQ.

The Dow industrials lost 225.47 points, or 1.5 percent, to close at 15,112.19. The Standard Poor’s 500-stock index fell 24.07 points, or 1.4 percent, to 1,661.32. The selling swept across all 10 industry groups in the S. P. 500.

The Nasdaq composite index dropped 63.16 points, or 1.7 percent, to 3,606.12.

“It seems like an overreaction today,” said Randy Frederick, managing director of active trading and derivatives at the Schwab Center for Financial Research.

Mr. Frederick said many investors were speculating that the improving economy meant that the Fed would start pumping less money into the financial system in the coming months. If that results in lower bond prices and even higher yields, it could lead more investors to dump dividend-paying stocks in favor of bonds.

“Some of the stocks getting hit hardest recently are big companies paying dividends,” Mr. Frederick said. Utilities stocks are down 3 percent this week, for example, the worst of the S. P. 500’s industry groups.

The government said on Thursday that the number of Americans applying for unemployment benefits dropped to 320,000 last week, the lowest level since October 2007, two months before the start of the recession.

A slowly improving economy should eventually lead to higher spending and more sales for big companies. But right now, investors are more focused on the Fed’s next move, said Natalie Trunow, the chief investment officer at Calvert Investments.

“There’s this counterintuitive reaction to economic news,” Ms. Trunow said. “Positive data comes out and markets aren’t excited about it. They say, ‘Uh-oh, the stimulus will be removed.’ ”

Wal-Mart fell $1.99, or 3 percent, to $74.41 after the company cut its profit and revenue forecasts for 2013. It also reported second-quarter results that missed Wall Street’s estimates.

Shares of Cisco Systems fell $1.89, or 7 percent, to $24.49, for the biggest drop of the 30 big companies in the Dow, after the company announced plans late on Wednesday to cut 5 percent of its work force, roughly 4,000 employees, as its sales slow.

Cisco’s announcement led to selling in other technology stocks, as it is widely regarded as a bellwether for the entire industry. That is because the company sells a wide range of products to corporations and governments and its fiscal quarters end a month later than most major technology companies’, which gives investors an early look into current conditions.

The Dow has slumped 2 percent so far this week, and the S. P. 500 is down 1.8 percent. However, the Dow is up 15.3 percent for the year so far, while the S. P. 500 is up 16.5 percent. Both indexes closed at nominal highs on Aug. 2.

In the bond market, interest rates climbed, and the yield on the 10-year Treasury note, a benchmark for interest rates on mortgage loans, jumped as high as 2.81 percent in early trading. The selling in the 10-year note eased a bit later in the day and its price ended down 15/32, to 97 22/32, giving it a yield of 2.77 percent, up from 2.71 percent late on Wednesday.

Higher long-term interest rates could cool housing sales. “A sharp increase in long-term rates translates into a sharp increase in mortgage rates,” Ms. Trunow said. “That’s bound to impact the housing market.”

Article source: http://www.nytimes.com/2013/08/16/business/daily-stock-market-activity.html?partner=rss&emc=rss