Stocks plunged Friday as fears rose that the U.S. is getting closer to attacking Iraq. The dollar fell to a 3-year low, while gold prices shot higher, as the Iraq situation heated up ahead of the U.N. weapons inspectors' report and President Bush's State of the Union address next week.
The Dow Jones industrial average fell 238.50 points, or 2.85%, to 8,131.01. The broader Standard & Poor's 500-stock index lost 25.94 points, or 2.92%, to 861.40. And the tech-laden Nasdaq composite index declined 46.13 points, or 3.32%, to 1,342.14.
"There are too many economic and geopolitical factors weighing on investors now," says John Licata, senior market strategist at BrokerageAmerica. He notes that the earnings news from bellwethers such as Microsoft (MSFT) have been mostly flat to slightly positive -- not enough to spark much buying.
Falling stock prices and the tense geopolitical situation with Iraq pushed the U.S. dollar down to a 3-year low of $1.08 against the euro. The dollar tumbled to 117.50 yen, and then recovered to just under 118 yen, reports MMS International.
Gold prices, meanwhile, rose to 6-year highs of more than $368 per ounce in futures trading. Stocks of gold-producing companies, a traditional safe-haven investment, once again rallied amidst war fears. Prices of crude oil also spiked higher.
The dreadful performance for stocks comes ahead of some key events. On Monday, United Nations' weapons inspectors are set to report the results of two months of searches to the U.N. Security Council. Stock prices continued to fall in heavy trading in the early afternoon on Friday, despite reports the White House is considering giving U.N. weapons inspectors more time before making any military move in Iraq. Most of Europe, Russia, and China are opposing action in Iraq. News agencies also quoted U.S. officials as saying that Saddam Hussein intends to damage or destroy his oil fields if war breaks out.
"Iraq remains the big risk," wrote S&P economists David Wyss and Rick MacDonald in a report Friday. "It is hard to see the U.S. receiving any U.N. support for action before April, which may be too late for war this year," they say. Stock prices could test the October lows if war starts, especially if the U.S. goes in alone without U.N. support, they say.
Traders also pondered the President's State of the Union address Tuesday, which is expected to provide the final definition of his stimulus package. "Although the weak economy is increasing demands to do something, Congress and the public seem increasingly convinced that the President's package is not the something to do," Wyss says. Bush's plan has come under criticism for spending too much on long-term tax reform rather than short-term stimulus and giving too much of the benefit to the rich. Critics also say the dividend proposal makes the tax code too complicated and subject to tax avoidance, notes Wyss.
In other events to watch next week, the Federal Reserve is expected to keep interest rates steady at its two-day meeting that begins Tuesday. Standard & Poor's expects the Fed to return to a statement outlining fears of low growth from the balanced risk assessment at the December meeting. "The Fed seems likely to wait until it sees how the fiscal package is moving through Congress before lowering rates," Wyss says.
The economic data calendar is also heavy. Existing home sales for December will come out Monday, followed by durable goods orders, consumer confidence, and new home sales on Tuesday. On Thursday, reports on weekly jobless claims and fourth-quarter gross domestic product are due. And Friday will bring updates on personal income and spending, University of Michigan's consumer sentiment, and the Chicago PMI manufacturing survey.
On the corporate front, fourth-quarter earnings reporting season rolls on with a number of big-name companies expected to report results, including American Express (AXP), Biogen (BGEN), Hershey Foods (HSY), AOL Time Warner (AOL), Phillip Morris (MO), Honeywell (HON), and
On Friday, one of the groups dragging the market down was insurers after a Morgan Stanley analyst downgraded ten names that it sees as more sensitive to the economy. Shares of American International Group (AIG) fell on Friday.
Electric utilities were also under pressure after American Electric Power (AEP) lowered its 2003 forecast and said it will cut 1,300 jobs and its dividend to preserve cash. The sector was also hurt by news that CMS Energy (CMS) suspended its dividend to conserve cash. The Michigan-based utility also widened its 2002 loss guidance and said it sees roughly breakeven 2003 reported EPS and ongoing EPS of 80 cents to 90 cents.
Upbeat earnings news from Amazon.com (AMZN) failed to lift the tech-heavy Nasdaq. The online retailer posted fourth-quarter EPS of 19 cents (pro forma) on a 28% sales rise. For the first quarter it sees EPS of one cent to five cents (pro forma) on sales of $1.025 billion to $1.075 billion. Salomon Smith Barney upgraded the stock to outperform, while Prudential raised estimates.
Western Digital (WDC) also gained ground after releasing positive earnings and outlook.
Defense company Raytheon (RTN) reported fourth-quarter EPS from continuing operations0 of 38 cents, vs. 17 cents a year ago, on a 6.1% sales rise. The company sees 2003 EPS of $1.70 to $1.80 on a 6% to 7% sales gain.
Treasuries exploded out of the gate and scarcely looked back Friday, capping off a very bullish week, notes MMS International. Given the dearth of data, extreme risk aversion was the main catalyst that dowsed stocks and bolstered Treasuries, MMS says. The yield on the benchmark 10-year note settled at 3.92%.
European stock markets were lower. Shares of Lloyds TSB Group Plc rose after Goldman Sachs said it thinks the British bank's profitability may improve. GlaxoSmithKline fell after halting the study of an asthma treatment.
London's FTSE index ended down 18.5 points, or 0.51%, to 3,603.7. In Paris, the CAC-40 index lost 19.37 points, or 0.66%, to 2,898.60. In Frankfurt, the DAX index fell 93.4 points, or 3.3%, to 2,717.82.
In Asia, stocks finished with losses. Japan's Nikkei 225 index fell 59.27 points, or 0.67%, to 8,731.65 amid a lack of fresh news and war fears. Profit taking sent high-tech stocks lower.
Meanwhile, Hong Kong's benchmark Hang Seng index declined 124.10 points, or 1.29%, to 9,460.60.