Another Down Day for Stocks

A poor earnings report from Intel hurt tech stocks, and an economic report revived worries about inflation

by Ben Steverman

The market's attempt to rebound from Tuesday's sell-off fizzled on Wednesday, as investors digested an uptick in inflation and more bad news on corporate earnings, this time from tech giant Intel (INTC).

A report on the consumer price index showed prices rose 4.1% in 2007, the highest rate since 1990. However, the CPI was much lower when energy and food prices are excluded.

Also, despite announcing weak end-of-the-year results, financial heavyweights JP Morgan Chase (JPM) and Wells Fargo (WFC) seemed to help stocks by giving investors a clearer look at the damage from the credit crisis.

On Wednesday, the Dow Jones industrial average fell 34.95 points, or 0.28%, to 12,466.16, while the broader S&P 500 slid 7.75 points, or 0.56%, lower to 1,373.20. Dragged down by Intel's weakness, the tech-heavy Nasdaq composite fell the most, off 0.95% or 23 points to 2,394.59.

The major indexes moved in and out of negative territory several times Wednesday before closing lower. For every stock falling on the New York Stock Exchange, another rose in price. On the Nasdaq, the ratio was 16 to 14 positive.

Stocks were coming off a tough Tuesday, when more credit trouble at Citigroup (C) and a fall in retail sales hurt major indexes, sending the Dow, S&P 500 and Nasdaq dropping more than 2%. So far in 2008, the S&P 500 is off almost 6% and the index has tumbled 11.7% from its peak in October.

In economic news Wednesday, the U.S. consumer price index rose 0.3% in December, slightly more than expected, with the core CPI (excluding food and energy costs) up 0.2%. Over all of 2007, the CPI rose 4.1%, while the core CPI rose just 2.4%, which is actually lower than in 2006. After a 5.7% gain in November, energy costs edged up 0.9% in December.

Investors were wondering how the inflation news would affect expectations that the Federal Reserve will cut the federal funds rate target by a half-point at the end of the month. Though core CPI inflation is under control, Bear Stearns economist John Ryding said non-core pressures, including both gas and food, are expected to continue rising in early 2008.

"While we expect the Fed to cut rates aggressively this quarter, we believe that this will add to inflation pressures," Ryding wrote. The uptick in the CPI "should prove temporary," said Aaron Smith, an economist at Moody's Economy.com. "However," he wrote, "there is a growing risk that an inflation problem could develop if the economy recovers in the second half of this year."

On Wednesday afternoon, the Federal Reserve released its so-called "Beige Book," a report on economic conditions around the country. In November and December, "economic activity increased modestly," the report said, "but at a slower pace" compared with the previous period. Seven of the Fed's districts saw activity increase, two were mixed, and three reported a slowing economy. "This report is a far cry from depicting an economy that is in a recession," Action Economics says.

However, economic data since the New Year and weak corporate profits are raising expectations for deep interest rate cuts. Deutsche Bank (DB) said it now expects the Federal Reserve to cut rates by half a point in January and again at the Fed's March 18 meeting. "In the current environment, we think the Fed is likely to do more rather than less," chief economist Joseph LaVorgna wrote.

Traders will be watching closely as Federal Reserve Chairman Ben Bernanke testifies before Congress on Thursday.

Oil prices were falling Wednesday, with February West Texas Intermediate crude oil futures down $1.04 to trade at $90.86 per barrel.

Among stocks in the news Wednesday, Intel (INTC) said it earned 38 cents per share in the fourth quarter, vs. 26 cents a year ago on an 11% rise in revenue.