) would have to restate its results after finding accounting inaccuracies of nearly $4 billion.
The major indexes had hit session lows -- with the Dow Jones industrial average falling nearly 200 points -- shortly after the Federal Reserve's mid-afternoon announcement that it was leaving the Federal funds rate at 1.75% and sticking to its neutral monetary policy bias, as expected.
But the market recouped most of its losses by the session's end, with the Dow finishing off only 6.71 points, or 0.07%, to 9,120.11. The Nasdaq composite index scratched out an increase of 5.43 points, or 0.38%, to 1,429.42. The Standard & Poor's 500-stock index dropped 2.60 points, or 0.27%, to 973.54.
President Bush commented on the WorldCom accounting fraud while meeting with British Prime Minister Tony Blair, saying that federal government would investigate and that the authorities would "hold people accountable" for misleading investors and employees.
"I think Bush's statement may have helped" the market, says Larry Rice, chief investment officer with Josephthal Lyon & Ross in New York. "Near term, the market had gotten oversold. But are there more WorldComs out there? There probably are."
WorldCom had already been in trouble after it was discovered that former CEO Bernard Ebbers owed the company some $366 million for loans and loan guarantees. WorldCom's latest news is expected to further erode investors' trust in public companies.
The news had sparked a sell-off around the globe with Europe and Asian markets all trading lower. The Standard & Poor's 500, a broad yardstick, closed the session less than 10 points above its post-September 11, low. Even with the stock market's less-than-devastating finish on June 26, the impact of WorldCom's troubles is big, Wall Street experts say.
"The economic data are no longer the driving force of stock market sentiment," says Sherry Cooper, global economic strategist at the Bank of Montreal in a research note. "Nor are positive earning reports taken as a signal of a turnaround. Too many now question the validity of those earnings, and the outlook in the telecommunications equipment sector remains especially murky."
Elsewhere in that troubled industry, shares of Qwest Communications (Q
) tumbled following press reports that the Securities & Exchange Commission is taking a tough stance on how the company accounted for as much as $1.4 billion in fiber-optic capacity.
Other phone companies felt the heat as well, including Sprint (FON
) and SBC Communications (SBC
Bank shares including Citigroup (C
) and JP Morgan (JPM
) were lower on fears of their exposure to WorldCom debt. The telecom has more than $30 billion in borrowing.
Investors will have economic data to consider on Thursday. The final reading on gross domestic product for the first quarter is expected to show that the U.S. economy grew at a 5.4% pace, slightly lower than the earlier 5.6% revised estimate, Standard & Poor's economic research unit MMS says.
Meanwhile, initial jobless claims for the week ending June 22 are expected to show that the number of people filing for first-time unemployment benefits fell to 390,000 from 393,000 in the previous week.
More companies are expected to report their quarterly results on Thursday. Among them are footwear and clothing concern Nike (NKE
), greeting-card publisher American Greetings (AMGTB
), and food producer ConAgra Foods (CAG
Wednesday's economic data releases were overshadowed by the WorldCom news. Durable goods orders rose 0.6% in May from a revised 0.4% gain in April. The orders data were largely in line with expectations and shouldn't have much impact on bonds.
U.S. new home sales jumped 8.1% in May, to a record 1.028 million-unit annual rate. Additionally, the figure for April was revised higher to a 951,000-unit rate, from 915,000. All the regions posted gains, with the Northeast up a huge 26.4% after three consecutive months of losses.
In equities, Micron Technologies (MU
) shares fell after the company posted a worse-than-expected third-quarter loss per share loss from continuing operations vs. one year earlier.
Cereal maker General Mills (GIS
) posted a 61% drop in quarterly earnings due to problems related to its acquisition of Pillsbury.
And Internet travel agency Priceline.com (PCLN
) cuts its revenue forecast, citing slowed June sales.
Treasuries ended higher but gave back much of their earlier gains as traders took profits and equities largely recovered.
Standard & Poor's MMS notes that the Fed's post-meeting statement was very well qualified, though with a slightly dovish spin. However, there was no overt acknowledgement of recent financial market troubles, though the Fed may hide behind its practice of not targeting stocks per se. According to MMS, this suggests that the Fed will watch from the sidelines while events unfold, without reverting back to an easing bias or tipping its hand in any other way.
European markets declined on the WorldCom news.
In London, the Financial Times-Stock Exchange 100 index was down 100 points, or 2.16%, to 4,531 as part of the global sell-off triggered by WorldCom accounting scandal in the U.S.
France's CAC 40 lost 65.27 points, or 1.73%, to 3,701.13 in reaction to the WorldCom scandal. Bonds were higher in a flight to safety.
Germany's DAX index was down 103.92 points, or 2.47%, to 4,099.05 in reaction to the WorldCom earnings misstatement. Many traders are worried that the euro's rise to the $0.9892 level against the dollar and potentially higher could stunt German export growth, further restrain struggling economic recovery.
Asia markets finished down. In Japan, the Nikkei 225 index closed lower by 422.11 points, or 4.02%, to end at 10,074.56. The index was hurt by futures-led selling amid worsening sentiment in the wake of lower-than-estimated earnings from Micron Technology and an earnings restatement from WorldCom.
In Hong Kong, the benchmark Hang Seng index ended down 253.06 points, or 2.39%, at 10,355.92.