The Herald Bulletin

Morning Update

Nation & World

August 15, 2013

Warnings of slower sales drive US stocks lower

NEW YORK — Grim sales forecasts from two major companies and concern that the Federal Reserve will soon start withdrawing its support for the economy pummeled the stock market Thursday.

The Dow Jones industrial average slumped 225 points, its worst day in nearly two months. Investors also dumped 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 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 Wednesday.

In a twist, more signs of resilience in the U.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 massive bond-buying program as early as next month. Many investors think that the Fed's effort 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 Standard & Poor's 500 index fell 24.07 points, or 1.4 percent, to 1,661.32. The selling swept across all 10 industry groups in the index.

The Dow lost 225.47 points, or 1.5 percent, to 15,112.19. The Nasdaq composite index fell 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.

Frederick said many investors are speculating that the improving economy means the Fed will 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," 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 early Thursday that the number of Americans applying for unemployment benefits dropped to 320,000 last week. That's the lowest level since October 2007, two months before the start of the Great Recession.

A slowly improving economy should eventually lead to higher spending and more sales for big companies. But that's down the road. 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 counter-intuitive reaction to economic news," 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 world's largest retailer cut its profit and revenue forecasts for 2013. It also reported second-quarter results that missed Wall Street's estimates.

Cisco Systems announced plans to cut 5 percent of its workforce, roughly 4,000 employees, as sales slow. CEO John Chambers called the global economy "challenging and inconsistent." Cisco plunged $1.89, or 7 percent, to $24.48, the biggest drop of the 30 big companies in the Dow.

Cisco's announcement led to selling in other technology stocks, as it's widely regarded as a bellwether for the entire industry. That's 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 this week, and the S&P 500 is down 1.8 percent.

The stock market reached all time-highs on Aug. 2. The Dow is still up 15 percent in 2013; the S&P 500 up 16 percent.

In the market for U.S. government bonds, the yield on the 10-year Treasury note jumped as high as 2.81 percent, the highest level since July 2011. The yield drifted back to 2.77 percent in the afternoon, up from 2.71 percent late Wednesday.

Higher long-term interest rates could cool housing sales because the 10-year U.S. government bond acts as a benchmark for interest rates on mortgage loans.

"A sharp increase in long-term rates translates into a sharp increase in mortgage rates," Trunow said. "That's bound to impact the housing market."

 

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