Stocks turned tail Thursday, as renewed economic worries and troubles at drug giant Pfizer Inc. helped push the Dow into a punishing 133-point drop that erased all of Wednesday’s big gain.
Thursday’s nosedive served to accentuate the downbeat mood that has held Wall Street in thrall for the last three weeks. At bottom, the unease now gripping investors is about interest rates.
“I think the recent volatility of the market is tied to investors trying to decide if the Fed is going to go too far, and raise rates to a level that chokes off economic growth,” said Jim McDonald, director of equity research at Northern Trust.
Since late September, assorted Federal Reserve officials have been dropping pointed hints about the extent to which soaring energy costs have heightened the threat of inflation.
Their unspoken message: Anybody who thinks that the Fed’s 15-month-old program of raising short-term interest rates was nearing an end should think again.
Far from ending next month, as some optimists had been hoping, it now seems clear that the tightening cycle will extend well into 2006, and short-term rates–currently at 3.75 percent–may well stairstep to 5.0 percent.
The Fed’s latest signals have put pressure on the market all through October.
Then on Wednesday, a ray of light: Sparked by an only modestly favorable economic report, equities staged a big rally, with the Dow up 128 points (1.25 percent) and the broader Standard & Poor’s 500 index rising 1.5 percent, for its biggest one-day climb since April.
That one-day run-up allowed stocks to win back about half of their October decline. But Thursday the downward trend returned with a vengeance.
A regional federal report showed growing inflation among the East Coast’s manufacturing sector, re-igniting the market’s worries. And Pfizer, the pharmaceuticals giant, dismayed investors by reporting lackluster quarterly earnings and backtracking from its earlier 2006 profit guidance. The result was a high-volume sell-off that drove the Dow component down 8.6 percent to $21.90, Pfizer’s lowest level in more than five years.
Fast-food icon McDonald’s also turned in disappointing results; its shares dropped 3.8 percent, to $32.40.
In the often volatile high-tech sector, an earnings shortfall sent shares of online auctioneer eBay down 6.8 percent to $39.15; Google shares declined 1.8 percent during the day, but then the search-engine company reported better-than-expected profits Thursday evening–setting the stage for a possible jump Friday morning.
Thursday’s markets also provided additional evidence that the long run-up in energy stocks may be running out of gas. Shares of ExxonMobil, Marathon, ConocoPhillips and Valero Energy all fell, continuing a recent weakening trend.
In New York Mercantile Exchange trading, crude oil for November delivery fell for a third straight day, dropping $1.38 to $61.03 a barrel, the lowest price since late July.
But cheaper oil most likely isn’t the true trigger for the energy group’s recent decline, suggests Northern Trust’s McDonald.
“To me,” he said, “the weakness in energy stocks is tied more to overall market concerns than the particulars of the energy sector.”
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– Among the relatively small number of stocks that managed a gain Thursday, newcomer CBOT Holdings was a standout. The Chicago Board of Trade parent (which went public Wednesday at $54 a share and closed its first day up a startling 49 percent) surged an additional 13 percent in its second day of trading, to close at $90.89.
Among other stock indexes, the S&P 500 fell 17.96 points, or 1.5 percent, to 1177.80. The Nasdaq composite index slipped 23.13, or 1.11 percent, to 2068.11.
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