Stocks took an afternoon pratfall Tuesday after a Federal Reserve official’s hawkish anti-inflation comments sparked investor fears that interest rates will keep rising.
Equity markets had been modestly positive early in the session. They went into a sharp slide after Dallas Federal Reserve Bank President Richard Fisher gave a speech emphasizing that the U.S. needs to be “especially vigilant” about suppressing inflationary pressures, because the inflation rate is now “near the upper end of the Fed’s tolerance zone.”
Fisher’s speech didn’t specify any particular policy change at the Fed. But his tough talk raised the specter of higher interest rates, which typically are a negative for stocks. What’s more, his comments came on a day when more cracks appeared in the consumer sector. And oil prices, which had been down significantly early in the day, later trimmed their losses. And in separate speeches, two other Fed officials mentioned inflation concerns.
The result? “The mood turned sour on Wall Street,” noted A.G. Edwards market strategist Al Goldman.
The Dow Jones industrial average, which was up more than 30 points, went into a slide and ended the day down 94.37, or 0.9 percent, at 10,441.11.
Dow component, and investor icon of stability, Procter & Gamble dropped $1.23, or 2.1 percent, to $58.08, after a Citigroup analyst, noting the potential for profit compression from rising raw materials costs, lowered her rating on the household-products giant to “hold” from “buy.”
Raw-materials issues also pushed shares of Goodyear Tire & Rubber lower. Citing Hurricane Rita-related disruptions in the supply of key materials, the world’s biggest tire producer said it’s cutting North American output by 30 percent. The company’s stock fell 83 cents, or 5.3 percent, to $14.94.
Clorox shares slipped 77 cents, or 1.4 percent, to $53.81, after the maker of household bleach lowered its profit guidance for the latest quarter, contending that “recent storms have further intensified costs for raw materials, transportation and utilities in our manufacturing operations.”
Wall Street is well into what’s sometimes known as the “corporate confession” period. Just after the close of every quarter, but before they have crunched the numbers enough to arrive at a final earnings figure, a certain number of companies discover their performance is going to fall short of analyst forecasts and issue a warning to investors.
Such disclosures are honorable but disconcerting to stockholders. When Lexmark International fessed up Tuesday, saying earnings won’t meet estimates because of disappointing sales of its computer printers, it sparked a sell-off that sent its shares down $17.44, or 29 percent, to a three-year low of $43.50.
On Wall Street there’s growing fear that sky-high gasoline prices are stripping consumers of cash, forcing them to cut costs by reducing expenditures on apparel, entertainment and other discretionary items.
Tuesday’s spate of profit warnings helped focus investor concerns on a related issue: growing evidence that higher energy costs are beginning to cascade through the economic system. As manufacturers seek to recover the cost of increasingly expensive raw materials, consumers are likely to be paying more for a host of products.
That process spawns inflation. And Fisher’s speech was only the latest in a series of Fed signals that inflation’s threat is strengthening–and that interest rate hikes are the tool to squelch its return.
Other indexes mirrored the Dow. The Standard & Poor’s 500 slid 12.23, or 1 percent, to 1214.47. The Nasdaq dropped 16.07, or 0.7 percent, to 2139.36.
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Oil for November delivery, which traded down by more than $2 at one point, ended the session off $1.57 a barrel, at $63.90.
Local stocks: Shares of fast-growing Lifeway Foods, a Morton Grove maker of the yogurt-like product known as kefir, surged $1.20, or 10.1 percent, to $13.05, after the company reported stronger-than-expected third-quarter sales. Lifeway’s often thinly traded stock tends to be volatile.
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