Stocks fall on uncertainty over interest rates after strong economic data

Cautious comments by the chairman of the Federal Reserve Board and weakness in the shares of Apple (Nasdaq: AAPL) led stock prices lower on Thursday. Even another drop in oil prices couldn't override investor concerns.

The Dow Jones industrial average fell 9.22 points to 12,567.93. However, the Nasdaq composite index suffered a bigger loss, down 36.21 points to 2,443.21.

The Nasdaq was crippled by a big drop in Apple. The shares fell $5.88 to $89.07 despite reporting that profits rose by 78 percent in the last quarter. However, cautious comments about future sales scared investors.

Oil prices resumed their downward bias Thursday, briefly falling below $50 a barrel. The Energy Department reported that both oil and gasoline reserves rose in the past week, a sign of reduced consumption. Crude closed at $50.48, down $1.76.

Government data released Thursday indicated slowly rising prices for consumers, as well as a surprising plunge in jobless claims to an 11-month low and a ramp-up in housing construction. The reports pointed to an economy that's more resilient than the market had thought, leading more investors to lower their expectations for a rate cut. A cut could boost consumer spending by making debt less cumbersome and help companies pull in higher profits.

"People have been focusing so much on the weak housing market, but it doesn't look like it's spilling at all into the rest of the economy. This expansion is going to go on," said Brian Gendreau, investment strategist for ING Investment Management. "The market has been pricing in a rate cut. It's still in there, but with a lot less conviction than before."

Plummeting energy prices are expected to be generally supportive to stocks, as lower fuel costs leave consumers with more money to spend. However, they are taking a toll on some energy-related stocks: ExxonMobil Corp. (NYSE: XOM) fell 50 cents to $71.96, while ConocoPhillips (NYSE: COP) fell 94 cents to $62.61.

The drop in oil also takes away some of the feel of a boom time from financial markets -- when crude peaked at $78 last summer, it helped draw new investment money. Now, the fear on Wall Street is that the pullback will have the opposite effect, sending some investors to the sidelines.

U.S. Federal Reserve Chairman Ben Bernanke's testimony to the Senate Budget Committee, in which he warned that long-term problems could arise if the national debt, Social Security and Medicare issues aren't dealt with, provided little direction for the markets, which instead focused on Thursday's economic reports.

The Labor Department said the Consumer Price Index rose by 0.5 percent in December, and jobless claims fell to a seasonally adjusted 290,000 last week. The Commerce Department said construction of new homes rose by 4.5 percent last month.

So far, most signs point to an economy that will keep slowly expanding -- neither requiring a rate cut, nor eating away at corporate profits. This should help the stock market in the long term, but many investors are treading cautiously, realizing after the market's sharp climb late last year, some of their expectations might have been overblown.

"The economy is not slowing down as much as market had hoped. The bottom line is, equity holders need to be a little more patient than they otherwise thought," said John C. Forelli, portfolio manager for Independence Investment LLC in Boston.

Strong earnings from Merrill Lynch (NYSE: MER) weren't enough to boost the market Thursday. The nation's largest brokerage reported fourth-quarter profit that surpassed Wall Street expectations -- just as rival JPMorgan Chase & Co.'s (NYSE: JPM) did Wednesday _ but Merrill stock slipped $1.41 to $95.40, retreating after rising in earlier trading.

Banks and brokerages have been performing well generally, on a surge in fund investment over the past year. The Bank of New York Co., one of the nation's largest trust banks, also beat analyst forecasts Thursday with its fourth-quarter financials. Its stock rose 69 cents to $40.94.

After the market closed Thursday, IBM Corp. (NYSE: IBM) said profit in the latest quarter rose 11 percent, beating Street estimates, and reported a huge increase in services contract signings -- which could mean high revenue going forward. Investors were not impressed, however, and sent shares of IBM down $4.25, or more than 4 percent, in after-market trading. IBM shares had fallen 57 cents to close at $99.45 Thursday.

The Russell 2000 index of smaller companies was down 10.56, or 1.34 percent, at 778.21.

Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange, where consolidated volume came to 2.89 billion shares, up from 2.72 billion shares at the same point Wednesday.

Overseas, Japan's Nikkei stock average rose 0.63 percent. Britain's FTSE 100 was up 0.09 percent, Germany's DAX index was down 0.18 percent, and France's CAC-40 was down 0.12 percent.

The Associated Press contributed to this report.

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