Stocks ran a gauntlet of gloomy news Thursday, finishing sharply lower for a second straight session (see BusinessWeek.com, 7/12/06, "Mideast, Tech Worries Sink Stocks"). Investors weighed rising Mideast tensions, an uncertain earnings season, and record-high oil prices. A midsession recovery attempt fizzled on afternoon reports of fresh clashes between Israel and Lebanese fighters.
On Thursday, the Dow Jones industrial average fell 166.89 points, or 1.52%, to 10,846.29, led downward by General Motors (GM) after rival Ford (F) cut its dividend in a bid to trim costs. The broader Standard & Poor's 500 index dropped 16.06 points, or 1.28%, to 1,242.54. The tech-heavy Nasdaq composite tumbled 32.61 points, or 1.56%, to 2,057.63.
The scope of the market's problems has broadened, with fresh worries seemingly popping up daily. Geopolitical flashpoints in Iran and North Korea have now been joined by the Israel-Lebanon conflict, and new violence by militants in Nigeria has endangered energy supplies there.
The global woes exacerbate an already ticklish situation for U.S. equity investors. Markets are also contending with the prospect of additional rate hikes from the Federal Reserve (see BusinessWeek.com, 6/30/06, "Bernanke's Timely Balm"). Other shadows lurking on Wall Street: slowing economic growth, and cooling corporate profits in the second quarter and beyond (see BusinessWeek.com, 7/07/06, "Gearing Up for Second-Quarter Earnings").
What should investors expect in the days ahead? Wall Street strategists will likely adopt a more cautious stance as the market's woes persist, and investors' appetite for risk diminishes. Indeed, Standard & Poor's cut its recommendation on the information technology sector to marketweight from overweight on Thursday -- at the same time boosting its call on the traditional defensive haven of consumer staples to overweight from marketweight (see BusinesWeek.com, 7/13/06, S&P Cuts IT Sector, Boosts Consumer Staples.
Economic reports may pile on more worries, some analysts say. "Next week, it will probably be inflation jitters again," notes Ed Yardeni, chief investment strategist at Oak Associates in a dispatch to clients. The Labor Department is set to release new readings for two key inflation gauges, the producer price index July 18 and the consumer price index July 19.
Despite market nervousness, the global economy continues to expand, others observe. "There are very few areas of the world outside the U.S. (and even here tentatively, for now) where the trend for activity and employment growth is taking a turn for the worse," points out Goldman Sachs economist Francesco Garzarelli in a report.
Geopolitical tensions remained in focus Thursday, as Israel bombed an airport in Beirut and Lebanese militants rocketed the port city of Haifa. Separately, Iran shrugged off a referral to the United Nations Security Council over its nuclear program. The news followed a bombing in India and escalating aggression from North Korea.
The Mideast unrest, coupled with an attack on a pipeline in Nigeria, sent oil prices to all-time highs. August West Texas Intermediate crude oil futures surged to a record $76.85 a barrel in afternoon trading before closing up $1.75 at $76.70.
Traders found little relief in corporate news Thursday. Analyst downgrades sank Dow members Disney (DIS) and Wal-Mart (WMT) lower. Shares in Merck (MRK) declined despite a legal victory. A New Jersey jury found that the drugmaker's Vioxx painkiller did not cause a woman's heart attack.
Tech stocks extended their recent woes. Dell (DELL) was lower after the computer maker unveiled plans to simplify pricing and reduce promotions, while reports of job cuts weren't enough to keep Intel's (INTC) shares afloat. Peer Apple (AAPL) was also lower a day after Credit Suisse warned that the iPod maker may trim its September-quarter revenue outlook.
Earnings worries continued to roil chip stocks. Cree (CREE) was sharply lower after the semiconductor maker said late Monday that it missed profit forecasts for the June quarter due to a production problem and higher taxes. The news follows recent bearish guidance from tech bellwethers Lucent Technologies (LU), Advanced Micro Devices (AMD) and EMC (EMC) as well as upbeat comments from Kla-Tencor (KLAC).
Software maker SAP (SAP) joined the chorus of downbeat tech reports. Shares fell after the Germany company posted lower-than-expected second-quarter profit amid its first market-share decline in three years.
In other earnings news, newspaper publisher Tribune (TRB) and hotel operator Marriott (MAR) declined as their quarterly results that missed Wall Street forecasts. Shares in PepsiCo (PEP) rose after the soft-drink maker reported a 14% rise in second-quarter net income.
Companies reporting earnings Friday include General Electric (GE). Second-quarter earnings season kicks into full gear next week.
Elsewhere, M&A activity was buzzing. Carlos Ghosn, CEO of Renault and Nissan (NSANY), reportedly said an alliance with General Motors (GM) could yield sizeable long-term benefits. Insurer AmerUs (AMH) was modestly higher after U.K. insurance heavyweight Aviva agreed to acquire the company for $2.9 billion.
On the economic front, initial jobless claims rose 19,000 to 332,000 in the week ended July 8, according the Labor Department.
Investors will be digesting a full plate of data Friday. Retail sales are expected to rise 0.6% in June, says Action Economics. Other data releases on tap include May business inventories, June import prices, and the preliminary July reading of the University of Michigan's consumer sentiment index.
European markets finished sharply lower Thursday on tech earnings worries. In London, the Financial Times-Stock Exchange 100 index slid 95.6 points, or 1.63%, to 5,765. Germany's DAX index tumbled 110.53 points, or 1.96%, to 5,527.29. In Paris, the CAC 40 index was down 89.21 points, or 1.81%, to 4,852.52.
Asian markets also finished lower. Japan's Nikkei 225 index declined 151.37 points, or 0.99%, to 15,097.95 amid nervousness ahead of the Bank of Japan's monetary policy decision Friday. In Hong Kong, the Hang Seng index skidded 216.73 points, or 1.31%, to 16,305.48. Korea's Kospi index lost 11.67 points, or 0.9%, to 1,285.02.
Treasuries gained in price as stocks sank. The 10-year note rose to 100-12/32 for a yield of 5.07%, while the 30-year bond climbed to 90-22/32 for a yield of 5.12%. Global risk aversion helped support Treasury prices, says Action Economics.