Stocks broke their winning streak on worries that an interest rate cut is not coming soon and Treasury yields approach 5%
U.S. stocks moved lower Tuesday on concerns about high interest rates after a speech by the Fed chairman and economic data pointing to a growing economy. Bond markets put pressure on stocks as yields approached 5% on two- and ten-year Treasuries.
Federal Reserve Chairman Ben Bernanke, in a speech Monday morning, said housing could remain a drag on the economy longer than expected. The housing crisis isn't likely to spill over into the broader economy, however.
Bernanke said he expects the economy to grow "at a moderate pace" in future quarters, and reiterated his concerns about inflation.
Many saw little in Bernanke's speech that was different from the Fed's previous statements. Barry Ritholtz, of Ritholtz Research & Analytics, says Tuesday's drop in stocks has less to do with Bernanke's speech and more to do with a growing fear that an interest rate cut may not be in the works. "People have slowly but surely come to the conclusion that we're not going to get a rate cut anytime soon," he says.
Goldman Sachs raised its forecasts for economic growth in the second and third quarters on Tuesday while saying it now doesn't expect the Fed to ease rates this year. Other Wall Street firms also changed their predictions based on recent data showing the economy rebounding from a flat first quarter. Investors learned Tuesday the U.S. ISM non-manufacturing index jumped to 59.7 in May, vs. 55.6 that economists expected, after rebounding to 3.6 points to 56.0 in April. Action Economics says most components of the index rose, adding to evidence that the economy is "back on strong footing" in the second quarter.
On Tuesday, the Dow Jones industrial average was down 0.59%, or 80.86 points, at 13,595.46. The broader S&P 500 index, was down 0.53%, or 8.23 points, at 1,530.95.
The tech-heavy Nasdaq Composite index moved down 7.06 points, or 0.27%, to 2,611.23.
Tuesday's drops broke a winning streak for stocks, which had passed S&P 500 and Dow record closing levels for several days in a row.
Some still believe the Fed could cut rates later this year. "Inflation has been moderating," says Bill Tedford of Stephens Capital Management. He says interest rates are more likely to fall than rise over the long-term. Bernanke believes in the dangers of deflation and will move swiftly to cut rates if inflation gets too low, Tedford says.
Many market experts have been predicting a short-term correction of 3 to 7% in stocks for the last few weeks. "Optimism has reached a relatively climactic level," says Chris Johnson of Johnson Research Group. The market is closely watching yields on Treasuries as they scrape against 5%, he says. That may be the "magic mark" that prompts investors to pull money out of stocks and into bonds. "You're seeing some selling pressure that's going to snowball," Johnson says.
In the energy markets, July crude oil futures on the NYMEX were down 60 cents to $65.61 a barrel.
Among stocks in the news on Monday, Bed Bath & Beyond (BBBY) moved lower after saying it expects first-quarter earnings per share of 36 to 38 cents on a lower-than-expected same-store sales rise of about 1.6%, vs. a previous view of 3% to 5%. Home furnishing retail stocks were down about 4% overall.
Amazon.com (AMZN) was up after the Wall Street Journal reported the company plans to increase investment in China.
Avaya Inc. (AV) agreed to be taken private by private equity firms Silver Lake Partners and TPG Capital for $8.2 billion, or about $17.50 per share, a premium of less than 5%.
Openwave Systems (OPWV) was down after rejecting an offer to buy 49% of the firm's outstanding shares by Harbinger Capital.
American Woodmark Corp. (AMWD) reported earnings of 40 cents per share, vs. 83 cents a year ago, on a 23% drop in revenue. The company says it completed a previously announced transition out of certain low-margin products.
UAL Corp. (UAUA) was trading higher after United Airlines unit reported its preliminary May traffic results, which showed the airline's highest-ever May passenger load factor of 84.6%. Total scheduled revenue passenger miles were up by 0.5%.
Trump Entertainment (TRMP) was down after Bear Stearns downgraded the stock to underperform from peer perform.
Financial Federal Corp. (FIF) was trading higher after reporting earnings of 48 cents per share, vs. 42 cents a year ago on a 15% increase in finance income. The firm announced a $50 million stock buyback program.
Most European stock markets moved lower on Tuesday. In London, the FTSE 100 index was down 0.47% to 6,632.80. Germany's DAX index was off 0.71% to 7,919.83. In Paris, the CAC 40 index moved 0.77% lower to 6,078.54.
Asian markets finished higher. In Japan, the Nikkei index rose 0.45% to 18,053.81. In Hong Kong, the Hang Seng Index was up 0.54% to 20,842.15. After tumbling 8.26% on Monday, China's Shanghai Composite was back up 2.63% to 3,767.10.
Bonds fell on Tuesday, pushing the two- and ten-year notes close to 5% yields. The 10-year Treasury note is off 11/32 to 96-9/32 for a yield of 4.98%; the 2-year note was off 2/32 at 99-25/32 for a yield of 4.99%; and the 30-year bonds were off 20/32 at 95-05/32 for a yield of 5.06%.