Stocks finished lower Tuesday as investors frowned on lackluster guidance from brand-name companies including media giant AOL Time Warner (AOL). A shift in recommended equity weighting from a top Wall Street strategist also prompted selling.
The major indexes have been climbing for the last two months. Some market watchers are concerned that the run-up is unsustainable as fundamentals remain weak. "With earnings season over and no positive economic news to propel it forward, it looks like the eight-week rally may be running out of steam," says Stephen Carl, principal and head of U.S. equity trading for the Williams Capital Group.
The Dow Jones industrial average finished down 119.64 points, or 1.35%, to 8,742.93. The tech-heavy Nasdaq composite index lost 35.81 points, or 2.41%, to 1,448.97. The broader S&P 500-stock index fell 13.78 points, or 1.47%, to 920.75.
Stocks were hit Tuesday, in part, by Merrill Lynch strategist Richard Bernstein's shift in recommended allocation for stocks to 45% from 50%. He says the market appears "very speculative." As part of the recommendation changes, he raised the bond allocation to 35%, up from 30% and kept cash at 20%.
Others take a less bearish view. "If you look at valuations and the history of valuations, there is a lot to be nervous about," says Sam Stovall, chief investment strategist with Standard & Poor's. However, Stovall notes that comparisons between the current bear market and those in 1990 and 1974 fall short. Modest inflation, low borrowing costs and lower oil costs make rebounding from this downturn easier.
"Investors focus more on faith than fundamentals coming out of a bear market. When things are starting to improve, they want to be buying in," Stovall says. While S&P does not recommend the technology or telecom sectors, shares in consumer discretionary product companies, energy and materials are worth considering, Stovall says.
After the closing bell Tuesday, Hewlett-Packard (HPQ) at an analyst meeting, discussed the progress of its recent merger with Compaq. Early in the meeting, the company said that it expects to reach $3 billion in merger cost savings in fiscal 2003, one year ahead of schedule.
Economic data on factory orders are due Wednesday and the latest employment report is expected Friday.
On Tuesday, shares of AOL finished down 14% after it reaffirmed overall company guidance for 2002 at an investor meeting. It added that earnings growth at the company will be at the low end of its 5% to 9% projections and revenue growth will be in the range of 5% to 8%.
Wall Street was unimpressed by the company's strategy to revamp the Internet service division of the company. AOL said that its troubled America Online division would see a steep decline of 40% to 50% in ad revenues next year, though a gain in subscription revenue would offset that loss. If that were to happen, revenues at the division in 2003 will be flat with 2002 levels.
Another much-anticipated update came from Cisco Systems (CSCO). The company said at its meeting with analysts and investors that it would not provide specific guidance for the current quarter, but would instead outline its strategy. Management said it plans to continue to acquiring strategically useful companies and setting up partnerships.
Among other tech forecasts, mobile phone maker Nokia Corp (NOK) offered a cautious outlook. It said that 2003 handset sales can grow by 10% or more over 2002 levels. That forecast is disappointing compared to some Wall Street analysts' estimates. Nokia stock fell 10%.
Texas Instruments (TXN) raised its revenue estimate for the fourth quarter, due to better demand for wireless and high-performance analog products.
In a see-saw session, Dow member Merck & Co. (MRK) declined amid worries of an earnings warning at an unexpected meeting Thursday. However, later in the session the drug company affirmed previous earnings guidance and said that its core pharmaceutical business would deliver double digit earnings per share growth in 2003.
U.S. Treasuries climbed higher on the back of a weak session for stocks. No major economic reports are due until Wednesday, when updates on ISM services, productivity and factory orders are announced. Traders say bonds are helped by the Bush Administration's skepticism on Iraq weapons inspections and Merrill Lynch's recommended allocation shift into bonds and away from stocks, according to MMS. Also, the softening rhetoric from the European Central Bank appears to be paving the way for an expected rate cut Thursday.
MMS also notes that despite all the volatility in financial markets in September, foreign accounts revealed a solid appetite for U.S. financial assets -- with a net buying of $45 billion. Not surprisingly, safe-haven assets like Treasuries accounted for the bulk of the strength, while equity demand was lower on market weakness.
European markets finished with losses. In London, the FTSE-100 index finished down 78.90 points, or 1.90%, to 4,075.40, amid news that house prices rose in November at the fastest pace in 13 years. Frankfurt's DAX index shed 99.71 points, or 2.95%, to 3,280.49, as businesses guide for a dismal year in 2003. The Paris CAC 40 index closed down 76.50 points, or 2.32%, to 3,222.26, as French consumer confidence remained unchanged in November.
In Asia, stocks ended with gains. Japan's Nikkei 225 Index closed up 30.64 points, or 0.33%, to 9,205.11, on mixed performance across sectors. In Hong Kong, the Hang Seng index added 21.85 points, or 0.21%, 10,227.01.