It would be easiest to describe the market’s downturn Tuesday by simply saying, “The Fed raised interest rates, and stocks fell.”
But the evidence suggests otherwise. It appears that investors were more focused on a downbeat forecast from personal computer-maker Dell than they were on the central bank’s widely anticipated rate hike.
The Dow Jones industrial average, which had rallied by more than 200 points over the previous two trading sessions, slumped 33.30, to 10,406.77.
Stocks drifted downward in advance of the Federal Reserve’s scheduled announcement. Then, as soon as the Fed announced, to the surprise of no one, its 12th consecutive quarter-point increase in short-term interest rates, the Dow briefly spurted up more than 40 points and into positive territory. But just as swiftly, the blue-chip index dropped to its earlier level.
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The Fed’s announcement turned out to be a “non-event” for Wall Street, as one market-watcher put it. Dell’s Monday evening profit warning, on the other hand, had a measurable impact.
Tuesday, investors responded to the company’s news with a sell-off that pushed Dell shares down 8.3 percent, to a two-year low of $29.24.
For good measure they also hammered shares of semiconductor-maker Intel, which provides Dell with chips. Shares of Dow component Intel sagged 3.6 percent, to $22.65.
Another member of the Dow, personal-products giant Procter & Gamble, turned in slightly better-than-expected quarterly results, but saw its stock fall 1.3 percent, to $55.25.
Other indexes showed the same slippage as the Dow. The broader Standard & Poor’s 500 index declined 4.25, to 1202.76. The Nasdaq composite index slid 6.25, to 2114.05. The Russell 2000 index of smaller companies slipped 3.59, to 643.02.
Treasury securities eased after the Fed’s announcement, with the price of the benchmark 10-year note dipping 4/32, to yield 4.58 percent.
Even if the Fed doesn’t raise or lower rates at every policy meeting, investors scrutinize the language in the statement that officials issue after each gathering. Often, even a tiny change in the way the statement describes the economy can telegraph coming changes in Fed policy.
But Tuesday’s statement “offered not so much as a hint that the end is in sight for the tightening program,” noted High Frequency Economics economist Ian Shepherdson.
The guessing game for now is when the Fed will stop its rate-hike program. In a presentation to Wall Street analysts Monday, Caterpillar Chairman and Chief Executive Jim Owens said his Peoria-based company was expecting the quarter-point hike Tuesday, followed by an additional series of increases that will raise short-term rates to 5 percent.
There is a possibility, “but not a likelihood,” he said, that the Fed could “overcorrect” and raise rates too high, squelching growth.
“The Fed rhetoric on inflation heated up over the past few weeks,” noted Clear View Economics economist Ken Mayland, “but I think there is less risk on the inflation front than the Fed believes.”
The Fed’s plan to continue raising rates, combined with other economic “headwinds,” Mayland said, means “growth is at risk in 2006, perhaps the middle quarters of the year.”
Local stocks: John B. Sanfilippo & Son shares tumbled more than 26 percent, to a two-year low of $13.44, after the Elk Grove Village nut and snack concern not only reported a first-quarter loss, but also warned that it’s likely to go into default of certain loan covenants this quarter or the next. At the height of the Atkins diet craze, Sanfilippo shares zoomed from below $10 to above $50. As the high-protein fad has faded, however, so has the company’s stock.
– Chicago Board of Trade stock tumbled 11 percent, to $95, after it reported the slowest pace of transactions growth in a year. The CBOT said it handled about 2.36 million contracts a day in October, 3.5 percent more than a year ago. The Chicago Mercantile Exchange said trading rose 40 percent last month, to 4.5 million contracts a day. But shares of the Merc also fell, sliding 1.4 percent, to $360.
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