The Dow Jones industrial average slid 98.3 points, or 1.09%, at 9,011.50. The broader Standard & Poor's 500 index shed 8.14 points, or 0.83%, to close at 975.31. Despite a strong morning with gains, the tech-heavy Nasdaq composite lost 2.98 points before the close, or 0.19%, finishing at 1,602.63.
Why did the markets slump on the Fed cut news? Standard & Poor's MarketScope noted that some on Wall Street complained that the wording of the Fed's post-meeting statement was not strong enough in terms of mentioning signs of economic strength.
S&P market analyst Paul Cherney says that the selling was selective. "It targeted the big cap names. Why do I say that? At both the Nasdaq and the NYSE, there were more advancers than decliners."
Michael Farr, president and chief investment officer at Washington, D.C. investment firm Farr, Miller & Washington adds that since the cut was so widely expected, and the language discussed a risk of deflation he "expected to see the market react less dramatically."
The Fed's statement indicated that Alan Greenspan & Co. see the risks to growth are balanced, but deflation is still a risk. "Though the Fed's split statement was virtually identical to the May 6 meeting, the spin on the economy was virtually 180 degrees different from that in May," says economic research outfit MMS International. "Today's statement begins on positive footing and says that there are signs of improvement."
The vote was 11-1 with Robert T. Parry dissenting, as he favored a more aggressive 50 basis points cut. "The economy...has yet to exhibit sustainable growth," according to the Fed statement. "With inflationary expectations subdued, the Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time."
The Board of Governors also approved a 25 basis point reduction in the discount rate, bringing it to 2%.
The Fed left enough room for another rate cut, says Kim Rupert, a senior economist with MMS International, "but it wasn't truthful. They think the economy is stronger, so they really aren't going to have to cut rates again, but they didn't want to completely disappoint the markets."
Earlier on Wednesday, investors received encouraging news on new residential sales for May, but a disappointing report on U.S. durable goods orders for the month. Sales of new, one-family houses in May, 2003, came in above expectations at a 1.16 million annual rate, up 12.5% from the revised April rate of 1,028,000, and 17.9% above the estimate of 981,000.
May Existing Home Sales rose 1.2% to a 5.92 million unit pace, as expected. MMS had expected U.S. home sales to rise: "The prominent factor behind the resiliency of the residential housing market has been interest rates, which defied expectations and moved lower through the spring."
U.S. durable goods orders declined 0.3% in May, after a revised 2.4% decline in April. The weakness was in transportation, which fell 1.6%. Excluding transportation, orders were up 0.2%. Nondefense capital goods orders fell 0.9%, and durable goods shipments fell 0.3% in May, after a revised 1.1% decline in April. The data were in line with the expectations of economic research outfit MMS International, though below market forecasts.
On the corporate front, Goldman Sachs (GS
) reported a 23% increase in net income in the second quarter, more than double than what was expected. Also, Goldman has more than doubled its dividend to 25 cents per share. Goldman shares closed lower by 2.2%.
Software company Verity (VRTY
) shed 29% to close at 12.30 after posting 11 cents vs. 9 cents fourth quarter GAAP earnings per share, on a 12% revenue rise. For the first quarter, the company sees 3 cents to 6 cents GAAP earnings per share based on a modest sequential decrease in revenues. Standard & Poor's maintains its 'avoid' rating.
Freddie Mac (FRE
) closed 1.5% higher, as the company expects the cummulative effect of a restatement of its earnings to increase retained earnings per share as of Dec. 31, 2002, by between $1.5 billion to $4.5 billion.
) released its fourth-quarter earnings after the close of trading Tuesday, reporting revenues of $225.8 million for the fourth quarter, down 3.2% from the comparable quarter in 2002, but up 8% sequentially. The company noted a 5% increase in worldwide sell-through of Palm-branded handhelds, an improvement from six consecutive quarters of decline. Palm closed up 5.7%.
ATI Technologies (ATYT
) gained 17% after posting third-quarter earnings of 7 cents per share, as higher costs offset a 29% rise in revenues. SoundView upped its rating on the stock to 'outperform' from 'neutral.'
Overnight delivery and shipping company FedEx (FDX
) closed lower, 1.3%, after J.P. Morgan reportedly changed its recommendation on the stock to 'neutral' from 'overweight.'
Meanwhile, delivery company CNF (CNF
) finished the day down 7.4% after announcing that it expected second quarter earnings per share of 26 cents to 31 cents, saying that the weak economy continues to affect all of its businesses. Morgan Stanley downgraded the stock to 'equal-weight' from 'overweight.'
The economic news calendar for the remainder of the week includes the Michigan sentiment on Friday.
Companies scheduled to report earnings this week include 3Com (COMS
), and Nike (NKE
Treasury prices were much lower on the Fed's decision to ease by 25 basis points, rather than the 50 basis points some bulls had hoped for, even though the divided statement left the door open for another easing. "Traders will now look for the dust to settle during Thursday's session and action should be consolidative," says MMS International.
Supply concerns also pressured treasuries Wednesday, with a jumbo debt offering by General Motors (GM
) add pressure to the long end, says MMS. Also Wednesday, the Treasury auctioned $25 billion in 2-year notes.
European bourses closed mixed, with investors waiting for a ruling from the FOMC meeting in Washington. Corporate news was sparse on Wednesday, though U.K. electrical retailer Dixons, is higher after noting a rise in confidence among its customers. Airline KLM traded lower on news that it plans to cut thousands of jobs.
London's FTSE 100 index was 14.10 points higher, or 0.35%, closing at 4,075.
In Paris, the CAC-40 index was closed up 5.36 points, or 0.17%, at 3,108.70. In Frankfurt, the DAX index finished the day down 17.06 points, or 0.53%, at 3,200.28.
Asian markets finished mixed on Wednesday. Japan's Nikkei 225 index gained 13 points, or 0.15%, to finish the day at 8,932.26. Traders were waiting to learn the results of the FOMC meeting in Washington. While many high-tech and blue-chips were down on profit taking, laggards and companies with specific news continued attracting buyers, says MMS. Canon lost 0.73%, Honda Motor declined 1.79%, Tokyo Election fell 0.77%, and Matsushita Electronics edged down 0.18%. Sony fell 1.8%. Meanwhile, Furukawa Electronics jumped 4.12%. Nippon Steel gained 1.96%, and Mitsubishi Heavy Industry moved 2.38% higher. In economic news, the Bank of Japan left monetary policy unchanged by unanimous vote, as was expected.
Hong Kong's benchmark Hang Seng index closed mostly unchanged. Stocks fell just 0.36 points, closing at 9,628.99.