Rally Cut Short by Earnings Concerns
Wednesday, October 15, 2008
Stocks stalled yesterday as concerns about corporate profits and the economic downturn overshadowed a new government plan to invest directly into major banks.
It was a disappointing follow-up to Monday's historic rally, which included an 11 percent gain on the Dow Jones industrial average, one of its largest percentage increases since the Great Depression. Some investors sold off shares to secure profits, analysts said, but the market was also feeling the effects of anxiety about the potential for a global recession and a trickle of earnings reports illustrating the economic downturn's impact on corporate balance sheets.
After surging more than 4 percent, or 400 points, during early trading, then bouncing between negative and positive territory, the Dow closed down 0.82 percent, or 76.62 points, at 9,310.99. The Standard & Poor's 500-stock index closed down 0.53 percent, or 5.34 points, at 998.01.
Investor worry about the economic downturn could best be seen on the tech-heavy Nasdaq. It spent most of the day in the red and closed down 3.5 percent, or 65.24 points, at 1,779.01. It was battered by unease over the outlook for firms like Google and Microsoft, which were down 4.81 percent and 5.49 percent, respectively. Credit Suisse lowered Microsoft's earnings forecast yesterday while also cutting expectations for the personal computer market.
Intel, the large computer chipmaker, fell 6 percent to $15.93 a share. It reported better-than-expected third-quarter earnings after the markets closed but said the financial crisis made it difficult to predict how it will perform for the rest of the year.
"The reality is that we're going to go into a recession and it's going to be a long and nasty one," said Sean Ryan, a banking analyst at Sterne Agee in New York.
In the latest effort to stem the financial crisis, the Treasury is investing taxpayer money directly into troubled banks. Nine large banks, including Bank of America, Citigroup and Goldman Sachs, will share $125 billion, while another $125 billion will be dispersed to other firms.
The financial sector rallied despite yesterday's volatility. Citigroup was up 18 percent to close at $18.62 a share, while Bank of America surged 16 percent to $26.53 a share. National City was up 35 percent, closing at $3.10 a share.
By taking partial ownership in banks and other measures, the U.S. government intends to unfreeze the credit markets and encourage banks to lend to each other, other businesses and consumers. Those markets appear to be making tentative steps toward loosening.
The rate at which banks lend to one another -- the London interbank offered rate, or Libor -- eased slightly yesterday, down to 4.6 percent from 4.7 percent on a three-month loan. But it is still much higher than the 1.5 percent bank lending rate set by the Federal Reserve. In normal times, the two rates would be closer to each other.
Economists are watching earnings reports for evidence of how the economic slowdown has affected corporate balance sheets. The results yesterday were mixed. Johnson & Johnson reported a 30 percent increase in its third-quarter earnings. Its shares were up 2 percent to $64.
But Pepsico, maker of Gatorade and Pepsi-Cola, reported a 9.6 percent drop in third-quarter profit and lowered its earnings forecast for the year. It plans to cut 3,300 jobs and close six plants. It closed down 12 percent at $54.40 a share.
The price of light, sweet crude fell 3.15 percent, or $2.56, to $78.63 a barrel. Prices could fall to about $50 a barrel if there is not an emergency -- a hurricane or tension in the Middle East -- that disrupts supply and spurs demand, said Phil Flynn, oil analyst at Alaron Trading in Chicago.