Stocks Drop After Bernanke Testimony

The Fed chief says he's worried about inflation, but still sees moderate growth

Stocks finished lower, as investors found little solace in Federal Reserve Chairman Benjamin Bernanke's testimony to Congress that mostly stuck to the message in last week's FOMC statement that indicated rates are on hold. Housing stocks were under fire on news that the FBI is probing Beazer Homes (BZH) for fraud (see BusinessWeek.com, 3/27/07, "Feds Are Investigating Homebuilder Beazer"). Also, a report showed durable goods orders rose less than expected. Oil prices surged amid fears that Britain-Iran tensions could escalate.

The Dow Jones industrial average fell 96.93 points, or 0.78%, to 12,300.36. The broader Standard & Poor's 500 index was down 12.38 points, or 0.87%, to 1,417.23. The tech-heavy Nasdaq composite lost 20.33 points, or 0.83%, to 2,417.1.

Wednesday's highlight was Joint Economic Committee testimony by Federal Reserve Chairman Ben Bernanke, who was questioned about the economy and subprime home loans and the housing sector. Bernanke said the Fed doesn't see any significant indications the subprime problems have spilled over, but the Fed is monitoring it closely. Bernanke reiterated that inflation remains the predominant concern, though increased "flexibility" was sought given rising economic risks in recent weeks, says Action Economics. He played down talk of a recession, and reiterated that the base estimate is still toward moderate growth, reports Action Economics. However, he did say that there are risks to both sides of the equation, says Action Economics. So it's uncertain where rates are headed in the near term.

In economic news, some were disappointed by news that durable goods orders rose by 2.5% in February after skidding 9.3% in January. The report fell well short of expectations for shipments and orders both overall and for capital equipment, "which significantly raises the downside economic risks over the coming months," says Action Economics. The economic research outfit cut its GDP growth forecasts to 1.6% in the first quarter and to 2.8% for the second quarter.

Thursday's release of the final reading of fourth-quarter GDP is expected to hold at the revised reading of 2.2%. The market will also look at the corporate profit data. Action Economics expects a drop of 4.5% in after-tax profits (not annualized).

Among other companies in the news Wednesday, Wal-Mart Stores (WMT) CEO Lee Scott reportedly says rising fuel prices could mean a challenging fiscal year 2008 (ending January). He also reportedly says "doing business in NYC is not worth the effort."

Accenture (ACN) said second-quarter revenues jumped 15% on strength in consulting. It raises its fiscal year 2007 EPS guidance on revenue growth at the high end of its 9%-12% range previously communicated. Stifel Nicolaus upgraded the stock to buy from hold.

In deal news, General Motors (GM) bowed out of the first round of the sale of Daimler-Chrysler's (DCX) Chrysler unit .

In the energy markets, May NYMEX crude oil shot up $1.16 to $64.09 a barrel. Prices remained firm ahead of the EIA inventory data, as Iran dominated market concern, though sellers emerged following not as large as expected draws in gasoline and distillate supplies, reports Action Economics.

European stock markets ended lower Wednesday. In London, the FTSE-100 index fell 25.4 points, or 0.4%, to 6,267.2. Germany's DAX index lost 41.45 points, or 0.6%, to 6,816.89. In Paris, the CAC 40 index was down 34.37 points, or 0.62%, to 5,552.69.

Asian markets finished lower. In Japan, the Nikkei 225 index fell 110.32 points, or 0.64%, to 17,254.73. In Hong Kong, the Hang Seng index lost 152.92 points, or 0.78%, to 19,553.87.

Treasury Market

The day started with yields plunging after a disappointing rebound on durable goods orders and weak ex-transport reading. But the much-heralded Bernanke JEC testimony made it abundantly clear that the Fed's inflation-fighting bias remained in place, disappointing short-term bulls and resulting in a rebound in yields, says Action Economics. The 10-year note yield rose slightly to 4.62%, after falling earlier to 4.577%.