Stocks Close A Big Week With a Whimper
Google Leads Tech Slide

By Renae Merle and Kim Hart
Washington Post Staff Writers
Saturday, July 19, 2008

U.S. stocks limped to the end of a volatile week yesterday as the financial sector continued a three-day rebound even while weakness emerged in technology stocks when Google and Microsoft reported disappointing earnings.

"I don't think we will see a week with as much packed into it again for a while," said Art Hogan, chief market analyst at Jefferies & Co.

The Dow Jones industrial average rose almost 50 points yesterday, driven higher in part by a Citigroup earnings report that beat analysts' expectations. The tech-heavy Nasdaq composite index, meanwhile, lost 1.3 percent as investors digested the earnings reports from Google and Microsoft late Thursday.

Both Google and Microsoft reported large jumps in revenue but profit that fell short of Wall Street's expectations. Yesterday, Google shares dropped $52.12, or 9.8 percent, to $481.32, its biggest one-day loss since it went public in 2004. Microsoft was off $1.66, or 6 percent, to $25.86, its worst one-day loss in two years.

But it was a week of renewed fortune for financial services firms. The industry began a rebound after federal regulators said they would crack down on some types of short sellers and bolster the mortgage giants Fannie Mae and Freddie Mac. Wells Fargo and J.P. Morgan Chase helped turn around investor pessimism with better-than-expected earnings that helped offset concerns about Merrill Lynch's continued losses, which reached $4.65 billion in the second quarter.

After closing below 11,000 for the first time in two years Tuesday, the Dow climbed another 49.91 points, or 0.44 percent, yesterday to close at 11,496.57. It is up more than 400 points for the week. The broader Standard & Poor's 500-stock index stayed nearly flat yesterday, up 0.36 points, or 0.03 percent, to close at 1260.68.

After losing 45 percent of their value last week, shares of Fannie Mae and Freddie Mac were up 22.6 percent and 10.2 percent, respectively, yesterday.

The market has also been boosted by a decline in crude oil prices amid concerns about weakening fuel demand. The price dipped to $128.88 yesterday, down more than $16 for the week on the New York Mercantile Exchange.

The technology sector has been relatively insulated from the most extreme swings of the stock market, but yesterday's dive by several major tech firms suggests that the economic troubles that have afflicted the banking and housing industries are beginning to spread to advertisers and Internet consumers.

The technology-oriented Nasdaq fell 29.52 points yesterday, or 1.28 percent, to close at 2282.78. It has gained 70 points since falling Monday.

The disappointing earnings from Google and Microsoft suggest that the general economic weakness could slow the technology industry's growth, said Laura Martin, senior media analyst with Soleil Securities. "If the economy weakens further and the weakness lasts longer, no company on the Standard & Poor's index will be unaffected," she said.

Other tech staples also took a hit. Apple was down $6.66, or nearly 4 percent, to close at $165.15. Advanced Micro Devices fell 65 cents, or 12 percent, to close at $4.65, and Amazon.com fell $2.99, or 4 percent, closing at $69.12.

"Investors in general are nervous about the economy, and that includes tech investors," said Walter Pritchard, senior analyst at Cowen & Co. in San Francisco. "There's not a lot of conviction out there on tech spending, and that's pressured tech stocks for the last two months."

Not all tech stocks disappointed, however. IBM, bolstered by strong earnings, rose $3.37, to $129.89. Yahoo rose a penny, to $22.45, thanks in part to its proposed search-advertising partnership with Google.

While business spending is still strong in many cases, consumer confidence is "a mess," Pritchard said. "If you look what's going on, people are up to their necks in mortgage debt and they can't afford to do much else."

Investors, focusing on the financial sector this week, largely overlooked a series of negative economic reports, said Joshua Shapiro, chief domestic economist at MFR, a New York research firm. The Commerce Department reported a continued slide in new home construction as well as an increase in consumer prices.

"The economic news continued to be pretty dismal. There was no indication it is improving; to the contrary, things are getting worse," Shapiro said.

More stable parts of the market have also been ignored by investors preoccupied with the financial sector, analysts said. "The market has been caught up in a tug of war between energy and financials," said Lori Calvasina, a U.S. equity strategist at Citigroup Global Markets.

In the meantime, health-care stocks have become a safe haven, she said. Shares of smaller health care companies were up 2.5 percent for the week, said Calvasina, who issued a report, "Hiding Out in Health Care," this week. "The health care sector is an attractive alternative to people who don't have an answer to that question: Where are financials and energy going?" she said. "This sector has removed itself from what's been going on."

It may be clearer next week whether the market is making a sustained rebound or just taking a breather from what will be a sustained declines, analysts said. Investors are anxiously awaiting several earnings reports, including from Bank of America, which recently completed its acquisition of Countrywide, and Yahoo.