Investors keyed on Bernanke's soothing remarks on the economy, but downbeat data on housing and manufacturing capped gains
U.S. stock indexes Wednesday recovered some of their losses from Tuesday's tumultuous session in heavy trading. The gains were small in relation to the 3%-plus drops seen a day earlier, after Tuesday's plunge in China's stock market sent U.S. indexes to their worst day in years. Shanghai rebounded overnight, but European bourses were lower and most Asian markets took a second straight tumble.
On Wednesday, the Dow Jones industrial average rose 52.39 points, or 0.43%, to 12,268.63. The broader Standard & Poor's 500 index added 7.78 points, or 0.56%, to 1,406.82. The tech-heavy Nasdaq composite gained 8.27 points, or 0.34%, to 2,416.13.
Market breadth was positive, with 21 stocks advancing for each 12 declining on the NYSE. Nasdaq breadth was 17-14 positive. Trading was heavy amid margin calls, notes Standard & Poor's MarketScope.
The rebound in stocks may have been aided by comments Wednesday from Federal Reserve Chairman Ben Bernanke, who was testifying to the House Budget Committee. Bernanke told the panel he didn't see any one factor that triggered yesterday's stock-market decline, and added that the "markets seem to be working well". He said Wednesday's slide did not change the Fed's overall view of the economy. The central bank sees moderate growth going forward and the fourth-quarter revisions today were "more in line with our thinking". Bernanke said "once the inventory correction is over we should see improvement in middle of year."
But upside may have been limited by some less-than-encouraging economic reports. U.S. fourth-quarter gross domestic product growth was revised down to 2.2% from the advance reading of 3.5%, for a third straight quarter below 3%. The headline number was "exactly as expected," says Action Economics.
Meanwhile, U.S. new home sales tumbled 16.6% in January to a 937,000 pace, the largest decline since 1994, from an upwardly revised 1.123 million in December.
The Chicago purchasing managers' index, a gauge of factory sentiment in the Midwest, eased to 47.9 in February, weaker than expected, from 48.8 in January.
Traders watched Wednesday's action closely for signs about the extent of Tuesday's damage. "Odds are [Tuesday's] sell-off represented the long-awaited correction and not the start of a protracted decline," says Richard Dickson, senior market strategist at Lowry's Reports.
The markets direction could depend on technical factors, some analysts say. "In other words, the market will stop declining when it wants to and we will take our cues from its near-term fluctuations," says Sam Stovall, chief investment strategist for S&P Equity Research.
Tuesday's decline marked an end to a remarkably tranquil eight-month run for stocks (see BusinessWeek.com, 2/28/07, "Stocks' Great Wall of Worry"). The Dow had gone without a drop of 2% or more since July 17, 2006, only to tumble 3.29% in the latest session. The market's slide put the Dow on pace for its first monthly loss since June, 2006, and the S&P 500 for its first since last May.
Some market pros saw Tuesday's sharp drop as a buying opportunity. "Various indicators suggest things should calm down," notes Tobias Levkovich, chief U.S. equity strategist at Citigroup. "Drops of 3%-plus in a day have generated an impressive record of market recovery with a near 80% investment success rate within 3 months."
In fact, some analysts see economic growth accelerating later this year. "Our view is that GDP growth slowed temporarily in the second half of 2006 due to the housing adjustment and inventory correction, and the economy is likely to grow at a faster pace in 2007 once these adjustments are behind us," observes John Ryding, chief U.S. economist at Bear Stearns.
Among Wednesday's stocks in the news, Home Depot (HD) was lower after the home-improvement retailer said the housing housing market won't get better until the second half of this year or early 2008. The company cut its 2007 profit forecast.
Sprint Nextel (S) was higher after the wireless carrier said fourth-quarter profits rose 33%, toppping analyst estimates.
Merck (MRK) was also higher after the drugmaker issued a first-quarter earnings forecast that beat Wall Street expectations.
On the downside, Joy Global (JOYG) was sharply lower after the mining equipment maker posted flat earnings for its fiscal first quarter.
In the energy markets, April West Texas Intermediate crude oil futures erased earlier losses to rise 33 cents to $61.79 a barrel, despite a weekly inventory report showing a slightly smaller than expected rise in crude supplies.
European markets finished sharply lower. The FTSE-100 index in London fell 114.6 points, or 1.82%, to 6,171.5. Germany's DAX index dropped 104.21 points, or 1.53%, to 6,715.44. In Paris, the CAC 40 index was down 72.07 points, or 1.29%, to 5,516.32.
Asian markets ended lower for a second straight day, though Shanghai, where yesterday's weakness started, climbed 3.94% overnight. In Japan, the Nikkei 225 index tumbled 515.8 points, or 2.85%, to 17,604.12. In Hong Kong, the Hang Seng index skidded 496.36 points, or 2.46%, to 19,651.51. Korea's Kospi index slid 37.26 points, or 2.56%, to 1,417.34.
Treasuries fell Wednesday as investors who flocked to the market in the previous session on a flight to safety unwound their positions. The 10-year note fell 13/32 to 100-16/32 for a yield of 4.56%. The 30-year bond tumbled 24/32 to 101-06/32 for a yield of 4.67%.