Markets & Finance

Stocks' New Year's Party Fizzles


The Dow pulled back from a new record Wednesday as the latest Fed minutes showed worries about inflation and the housing sector

Wall Street rang in the new year in topsy-turvy fashion Wednesday. Stocks finished mixed on heavy volume, as the Dow pulled back from triple-digit gains after the latest Federal Reserve minutes showed worries about inflation and the scale of the housing sector pullback. Investors were also digesting a set of mostly upbeat economic reports, falling oil prices, and news on a pair of high-profile retailers.

On Wednesday, the Dow Jones Industrial average rose 11.37 points, or 0.09%, to 12,474.52, after touching an all-time intraday high of 12,580.35. The broader Standard & Poor's 500 index fell 1.7 points, or 0.12%, to 1,416.6. The tech-heavy Nasdaq composite added 7.87 points, or 0.33%, to 2,423.16.

The Fed minutes coincided with a round of afternoon profit-taking, analysts say. "This let some air out of the bullish 2007 equity bubble, with the unspoken stagflation risk a recipe for investor anxiety," says Action Economics.

Some market pros attributed the day's early surge to investor exuberance as 2007 got underway. "We don't put a lot of stock in the opening day," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "It looks like people are trying to make up for lost time."

In economic news, Fed policymakers continued to express concern about inflation in the minutes to the Fed's Dec. 12 interest-rate meeting. The minutes also indicated increased anxiety about "subdued" economic growth due to the housing slowdown.

Earlier, other economic reports contributed to the morning's gains. The Institute for Supply Management's manufacturing index rose to 51.4 in December, slightly stronger than expected, from 49.5 in November. Elsewhere, construction spending slipped 0.2% in November, less than expected, following a 0.3% decline in October.

On the payrolls front, the ADP labor index fell 40,000 in December after a 158,000 increase in November. The Hudson employment index dipped 2.6% to 102.7 in December, from 105.3 in November. These disappointing readings suggest possible weakness in Friday's closely watched employment report, says Action Economics.

Looking ahead, the economic docket Thursday holds weekly jobless claims, the Institute for Supply Management's non-manufacturing index, pending home sales, and factory orders.

Oil prices dropped Wednesday, weighing on corresponding shares, as unseasonably warm temperatures persisted across the Northern Hemisphere. In the energy markets, February West Texas Intermediate crude oil futures fell $2.73 to $58.32 a barrel.

Among stocks in the news, Home Depot (HD) was higher after CEO Robert Nardelli resigned following criticism over his pay and the stock's performance during his six-year tenure.

Wal-Mart (WMT) was higher after the retail giant issued upbeat December same-store sales guidance over the weekend.

Shares of homebuilder Lennar (LEN) dipped following a disappointing preannouncement on fourth-quarter earnings.

A number of analyst calls were also in focus. Merck (MRK) was higher after Bear Stearns raised its recommendation on shares of the drugmaker from peer perform to outperform.

On the downside, Amazon (AMZN) was lower after Citigroup cut its rating on the stock from hold to sell.

Dow component General Motors (GM) was lower after Bank of America downgraded the shares from neutral to sell.

Separately, automakers were reporting mixed December sales. Unit vehicle sales rose 3% to an estimated 16.5 million in December, says Action Economics.

Toyota (TM) led the way with a 12% gain, while Ford (F) and General Motors posted double-digit declines. DaimlerChrysler (DCX) said sales fell 1%.

European markets finished mixed on Wednesday. The FTSE-100 index in London rose 8.1 points, or 0.13%, to 6,319. Germany's DAX index added 10.19 points, or 0.15%, to 6,691.32. In Paris, the CAC 40 index slipped 6.79 points, or 0.12%, to 5,610.92.

Asian markets ended mixed. In Hong Kong, the Hang Seng index gained 413.39 points, or 0.51%, to 20,413.39. Korea's Kospi index tumbled 25.91 points, or 1.81%, to 1,409.35. In Japan, the markets were closed after the Nikkei 225 index on Dec. 29 edged up 1.02 points, or 0.01%, to 17,225.83

Treasury Market

Treasury yields fell after the weak employment readings, but bounced back on the solid ISM number. The 10-year note rose in price to 99-24/32 for a yield of 4.66%, while the 30-year bond climbed to 95-29/32 for a yield of 4.76%. The bond market showed little reaction to the December FOMC minutes, says S&P.

Hogan is a reporter for BusinessWeek.com in New York.

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