Early gains from positive profit reports were overshadowed by new concerns about slowing GDP growth
Major U.S. stock indexes finished mostly higher on Wednesday, with the U.S. benchmark index giving back early gains and sinking lower as investors turned their attention from profit reports to a lower growth forecast for the global economy by the International Monetary Fund, as well as negative Beige Book data from the Federal Reserve.
A modest uptick in core inflation, which left investors believing that the Federal Reserve still has room to cut interest rates if it needs to, was offset by another batch of dismal housing data.
On Wednesday, the Dow Jones industrial average closed down 20.40 points, or 0.15%, to 13,892.54, well above its intraday lows. The broader S&P 500 index edged 2.71 points, or 0.18%, higher to 1,541.24. The tech-heavy Nasdaq index advanced 28.76 points, or 1.04%, to 2,792.67.
On Wednesday morning, equities had rebounded from a two-day skid thanks to strong earnings from a handful of technology companies and Dow components such as Coca-Cola Co. (KO). But as the session wore on, initial optimism gave way under the weight of an IMF projection that global economic growth will slow in 2008 to 4.8% from an expected 5.2% in 2007 due to turbulence in global financial markets set off by fallout from the U.S. subprime mortgage market. Up till now, the saving grace for U.S. equities has been the strength of the global economy.
There was also talk of reallocations of money from the stock to the bond market, S&P MarketScope said.
In economic news, the Fed's Beige Book showed that the pace of economic growth slowed in September amid higher input costs and a tighter labor market. The report said that consumer spending continued to expand in September but at a slower pace than in August, and that uncertainty about the economic outlook across many industries could reduce capital spending. The Beige Book also said business lending grew while consumer lending slowed and that manufacturing growth had slowed, especially for home-related goods.
The consumer price index rose 0.3% while, after a 0.1% increase in August, while core inflation, which excludes food and energy prices, was up 0.2%, after rising 0.2% the prior month. Energy prices set the pace for the strength of the headline number, up 0.3% after falling nearly 5% over the prior three months, with the biggest impact coming from a 0.4% rise in gasoline prices. Food and beverage prices climbed 0.5% in September, while housing costs climbed 0.3%.
The CPI data didn't cause the market to blink, as it remains focused on core inflation. Earlier this week, Fed Chairman Ben Bernanke said he was watching the trend in the core number rather than the headline number, given how extremely volatile energy prices are, said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.
It also helped that housing starts and permits came in lower than expected, since Bernanke talked about housing damping economic growth fore the foreseeable future, which should contain the inflation risk as well, as there won't be much demand in the housing sector, Stone said.
All of which should give the Fed the leeway to cut interest rates further if that is deemed necessary, he added.
The year-over-year inflation growth figure, which jumped to 2.8% in September and could reach 3.5% in October, are being viewed with less concern as the comparisons are bound to be tough after CPI declines of 0.4% last September and 0.5% last October and given how much food and energy prices have risen in the past year, Stone said.
Housing starts dropped 10.2% to an annualized rate of 1.191 million in September -- the lowest level in 14 years -- after falling 3.2% to a revised 1.327 million rate in August. Single family starts fell 1.7% while multi-family starts plunged 34.3%. The biggest decline was a 28.4% drop in the Midwest, while starts in the Northeast rose 45.4%.
Building permits fell 7.3% to an annualized pace of 1.226 million in September, after a 4.8% drop to 1.322 million in August.
The new data reflect the direct effects of the seizing up of credit markets in August and would seem to justify the drop in builder confidence to the lowest level in the 22-year history of the National Association of Home Builders/Wells Fargo Housing Market Index, as reported Tuesday.
"We have a bifurcated market here. The financial stocks are not doing well," said Art Hogan, chief market analyst at Jefferies & Co. in Boston. "The question is can you have a strong market with just the techs, or do you need broader leadership?"
The market won't find that leadership in either the energy or financial sectors, which, together with technology, are the three largest components of the S&P 500, he added.
With Wednesday's weaker-than-expected housing data –- when expectations had been set fairly low to begin with -- "the chief concern is how close are we coming to stall-speed in economic growth?" Hogan said. Any pace of growth "below 2.0% gets you close to a credible fear of slipping into recession."
The economy growing at a pace below 2.0% would also spell bad news for corporate earnings, he added.
The oil market weathered another choppy ride on Wednesday. Crude oil for November delivery in New York ended 21 cents lower at $87.40 a barrel after profit-taking erased gains that pushed the price to a new high of $89 a barrel on news that Turkey's Parliament had approved troop movements into northern Iraq against Kurdish rebels, though an incursion may not be imminent. The prospect of supply disruptions in a region that holds a major portion of world crude reserves had eclipsed the bearish impact of a U.S. Energy Information Administration report that showed larger-than-expected gains in crude and gasoline inventories during the week ending Oct. 13 and a surprising 1.0 million-barrel rise in distillate supplies, which had been forecast lower.
The dynamics in the oil market have shifted to fear of supply disruptions from a prior focus on global demand outstripping growth in non-OPEC supply, said Hogan at Jefferies. Fear over possible supply disruptions always bring more speculators into the market, he said.
Among stocks in the news Wednesday, Coca-Cola shares rose 1.8% to a new 52-week high after the soft-drink giant reported a third-quarter profit of 71 cents a share, vs. 62 cents a share a year ago on a 19% increase in revenue.
IBM (IBM) shares fell 2.6% despite a third-quarter profit of $1.68 a share from continuing operations, up from $1.45 a share in the prior-year period, on a 6.6% revenue increase.
Intel (INTC) shares climbed 5.0% after the company said it earned 31 cents a share, vs. 22 cents a share in the third quarter of 2006 on 15% higher revenues. The chip maker projected revenues of $10.5 billion to $11.1 billion in the fourth quarter and a gross margin of roughly 57%. The company also named Stacy J. Smith as CFO, replacing Andy Bryant, who has been appointed to a new position of chief administrative officer.
Yahoo (YHOO) shares rose 8.1% after it posted earnings of 11 cents a share (GAAP) in the third quarter, flat with a year ago, as higher operating expenses offset a 12% rise in revenue.
United Technologies (UTX) shares fell 3.9% despite reporting $1.21 a share in third-quarter earnings, vs. 99 cents a share in the year-ago period, on a 14% rise in revenue. The company forecast 2007 earnings of $4.22 to $4.25 a share, the top end of its prior range, but said that 2008 will be challenging and that its air-conditioning business has been hurt by slow home sales.
JPMorgan Chase & Co. (JPM) shares rose 2.9% after it posted earnings of 97 cents a share in the third quarter, compared with 92 cents a year ago on a 3.6% gain in revenue. Private equity gains of gains, $766 million, plus $115 million from the sale of its MasterCard stake helped offset more than $1.5 billion of write-downs and losses due to risky corporate lending and falling mortgage values.
JPMorgan's profit growth looked even better when compared with big haircuts that Citigroup and other investment banks have taken in the third quarter. There were unconfirmed rumors circulating Wednesday that Citigroup Chairman and CEO Chuck Prince was on his way out the door due to enormous subprime-related asset writedowns, CNBC said.
European equity indexes were trading higher Wednesday. In London, the FTSE 100 index climbed 0.96% to 6,677.70. Germany's DAX rose 0.29% to 7,985.41. In Paris, the CAC 40 gained 0.77% to trade at 5,818.80.
Asian markets ended mostly lower. In Japan, the Nikkei 225 index fell 1.07% to 16,955.31. In Hong Kong, the Hang Seng index rose 1.19% to 29,298.71. The Shanghai composite index slipped 0.92% to 6,036.28.
Treasury prices moved higher Wednesday. The 10-year note rose 22/32 in price to 101-16/32 for a yield of 4.56%, and the 2-year note gained 08/32 to trade at 100-00/32 for a yield of 3.99%. The 30-year bond jumped 1-10/32 to 102-25/32 for a yield of 4.82%.