Financial markets' tentative optimism ahead of the passage of a U.S. stimulus plan -- which helped fuel a four-day advance for major equity indexes -- was swept aside Thursday by another grim round of economic reports. The worse than expected data on new home sales, durable goods orders, and weekly first-time jobless claims sent U.S. stock indexes sharply lower.
Traders may have also been spooked by talk that Congress is considering measures to ban naked short selling and restrict trading in credit default swaps, according to S&P MarketScope. Weak earnings reports from Allstate (ALL), Ford Motor Co. (F), Qualcomm (QCOM) and other companies also dampened the market's mood.
Stocks snapped a four-day winning streak Thursday as fresh signs of economic weakness led to broad-based profit taking in the market. The 30-stock Dow Jones industrial average finished lower by 226.44 points, or 2.70%, at 8,149.01. The broad S&P 500 index was off 28.98 points, or 3.32%, at 845.11. And the tech-heavy Nasdaq composite index fell 50.50 points, or 3.24%, to 1,507.84.
On the New York Stock Exchange, 25 stocks were trading lower in price for every six that advanced. Nasdaq breadth was 21-6 negative.
Treasuries were sharply lower in price after an auction of 5-year notes produced mediocre results. The yield on the 10-year note climbed to 2.86%. The dollar index was higher. Gold futures were higher, while crude oil futures were mixed.
"Today's U.S. economic reports ranged from bad to worse," says Action Economics chief economist Michael Englund.
Where to begin? U.S. new home sales dropped 14.7% to a 331,000 unit annual pace in December, from a downwardly revised 388,000 in November (from 407,000 previously). October's 419,000 pace was revised to 406,000. And net revisions over the prior several months were -40,000. Declines were posted in all four regions.
The months' supply of homes climbed to 12.9 from a revised 12.5 (was 11.5 previously). There were 357,000 homes for sale, versus 397,000 in November (revised from 374,000). The median price declined to $206,500 from $219,700 (revised from $220,400). That's down 9.3%, year-over-year.
Morgan Stanley economist Ted Wiesman notes that homebuilders say they are unable to compete with the flood of foreclosed homes hitting the market at fire sale prices. "Even with housing affordability surging, efforts to stem foreclosures remain key to stabilizing the housing market," he wrote in a note Thursday.
There was more bad news from the manufacturing sector. Orders for durable manufactured goods fell 2.6% in December, the fifth consecutive monthly decline. The drop was even worse than the negative 1.8% expected by the consensus. The decline follows a 3.7% November drop. Aircraft orders plunged 43.6%, after a 46.3% November drop, reflecting production difficulties at Boeing. Defense aircraft orders were up 16.4%, however. Excluding the 32.9% rise in defense orders, orders fell 4.9%. Shipments, a more stable indicator, fell 0.7% in December after a 4.2% November drop.
"The report is worse than expected, with declines in virtually every nondefense category," says S&P senior economist Beth Ann Bovino. "The manufacturing sector continues to deteriorate."
Meanwhile, data on the number of Americans filing first-time claims for unemployment pointed to worsening conditions in the the labor market. U.S. jobless claims rose 3,000 to 588,000 for the week ended January 24, stronger than the 570,000 expected by markets.
Continuing claims surged 159,000 to 4,776,000 in the week ended January 17, and are the highest on record.
"Even relative to the size of the labor force this was the worst reading since 1983, with the insured unemployment rate rising to a 26-year high of 3.6% from 3.4%," wrote Morgan Stanley economist David Greenlaw. "We continue to forecast a 550,000 plunge in January nonfarm payrolls."
With those reports out of the way, traders began to look ahead to Friday's release of advance data on U.S. gross domestic product. The consensus forecast calls for a 5% decline in U.S. economic output, though Action Economics thinks the decline could be as high as 6.5%.
In addition to the closely watched GDP report Friday, the market will also be eying updates on employment costs, the Chicago purchasing managers' index, and consumer confidence.
On Wednesday night, the House passed President Obama's stimulus bill, despite Republican opposition. Reuters reports Senate Republicans accepted Obama's offer to search for a compromise on an economic stimulus bill that could end up costing around $900 billion, as long as tax cuts play a large role. The Senate is expected to start considering the massive bill next week.
There is "much debate over whether Obama's House-passed economic plan is a stimulant or a pork gift," according to S&P MarketScope.
In addition to worries about the broader economy, the bleak corporate earnings picture has continued to weigh on stocks. S&P Index Services reports that with 40% of the S&P 500 having reported fourth-quarter 2008 results, the "As Reported" EPS of the index is on track to be the worst since the 2002 fourth quarter.
Allstate shares fell Thursday after the insurer posted $0.97 vs. $1.24 fourth-quarter operating EPS on sharply lower investment income. S&P Ratings Services lowered its counterparty credit and financial strength ratings on Allstate's core property-liability and life insurance companies to AA- from AA.
Continental Airlines (CAL) posted a $2.33 fourth-quarter loss per share vs. a $0.33 loss on 1.5% revenue drop.
Shares of Eastman Kodak (EK) plunged Thursday after the company posted preliminary fourth-quarter adjusted loss from continuing operations of $0.50 per share vs. $0.31 EPS on a 24% revenue decline. The company expects to reduce its worldwide employment by between 3,500-4,500 positions during 2009, approximately 14%-18% of its total workforce. In connection with restructuring actions, Kodak expects to incur charges against earnings in 2009 in the range of $250 million-$300 million, and make payments from corporate cash in the range of $225 million-$275 million.
Ford Motor Co. posted a $1.37 fourth-quarter loss per share from continuing operations (excluding special items) vs. a $0.23 loss on a 36% revenue decline. The company said that based on current planning assumptions, it does not need a bridge loan from the U.S. government, barring a significantly deeper economic downturn or a significant industry event. It also said it remains on track for both its overall and North American automotive pre-tax results to be breakeven or profitable in 2011, excluding special items, based on current planning assumptions.
Eli Lilly & Co. (LLY) posted $1.07 vs. $0.90 fourth-quarter non-GAAP EPS (excluding the impact of the Imclone acquisition) on a 3% U.S. sales rise. Lilly said the EPS increase was driven by an improvement in gross margin as a percent of sales. The company reconfirmed its 2009 EPS forecast of $4.35-$4.55, excluding estimated ImClone dilution.
Dell Inc. (DELL) says fourth-quarter results will include expenses related to continued improvement in its competitive position, part of $3 billion in planned cost reductions by end of fiscal 2011. The company expects to recognize estimated pretax expense of $135 million to further optimize its global manufacturing and distribution network and to reduce its workforce. Separately, Dell will incur a pretax, noncash expense of about $145 million related to stock-based compensation. Together the cost-reduction and stock-based compensation expenses will total about $0.11 per share.
Andrews is managing editor of the Investing Channel for BusinessWeek.com .