Stocks were bloodied on Wednesday after the Federal Reserve released its latest update on economic conditions across the country, showing the economy had "slow growth or lateral movement" in June and July.
For most of the session, a warning that tough conditions may hinder a profit recovery, from technology bellwether Cisco Systems (CSCO ), weighed on the major indexes. But a dismal economic update from the Fed on top of the networker's uncertain outlook and other dismal economic reports this week, drove stocks to session lows.
Technology shares were the worst hit. The Nasdaq Composite index lost 61.43 points, or 3.03%, to 1,966.36. Meanwhile, the Dow Jones Industrial Average shed 165.24 points, or 1.58%, to 10,293.50. And the broader Standard & Poor's 500-stock index fell 20.87 points, or 1.73%, to 1,183.53.
In the latest ugly economic news, the Fed's Beige Book, an anecdotal report on economic health from the central bank's 12 regional branches, showed the ongoing manufacturing slowdown extended into other areas of the economy and across districts. The factory sector was weak in almost all regions, retail sales were below expectations and the services sector was facing weak demand.
The latest economic data did not really tell investors anything new. Weakness appears to be spreading broadly, analysts say, but it isn't a big surprise. "People had been anticipating that kind of spillover effect for some time. A slowdown on the consumer side after a year of slowdown in manufacturing shouldn't be such a big deal," says Charles Lemonides, chief investment officer at M&R Capital.
The Beige Book is used by the Fed to calculate how much to adjust interest rates. "If there was any doubt that they were going to ease on Aug. 21, that's been removed," says Joe Liro, an economist at Stone & McCarthy Research Associates. " Liro, like most analysts, expects a 25 basis point rate cut at the next meeting of the FOMC, the Fed's rate-setting committee.
So far, interest rate cutting has done little to spark the economy. The Fed has already cut rates by 2.75 percentage points to 3.75% since the beginning of the year, but analysts are counting on continued aggressive cutting to jumpstart the economy and corporate profits. "Eventually the rate will come down to 3% when it's all said and done," predicts Richard Cripps, chief market strategist at Legg Mason wood Walker.
The Fed's anecdotal update had a few bright spots: stable real estate markets, balanced retail inventories and strong car sales in some areas. But, investors remain unmoved. "There is little conviction that the liquidity out there wants to come into the market," Cripps says.
More negative economic data are expected Thursday. Trade price indexes are expected to show another month of weakness in July, as the strong dollar and falling energy costs drive U.S. trade prices lower. S&P's economic research unit expects import prices to fall 0.3% overall and 0.1%, following respective declines of 0.5% and 0.4% in June. The data is set to be released at 8:30 am ET Thursday.
U.S. Treasuries rallied on weakness in stocks and the Fed's latest anecdotal report on the health of the economy.
In other economic data, wholesale inventories fell 0.2% for the month of June, following a 0.2% rise in May. The decline was slightly larger than expected. Wholesale sales, which S&P forecasted to rise 0.3%, slipped 0.9%. The data are not expected to affect markets.
European markets finished lower after Germany's Bayer said it was pulling anti-cholesterol drug Baycol/Lipobay because of reported side effects. Bayer will miss earnings targets for 2001. In London, the Financial Times-Stock Exchange 100 index ended down 60.30 points, or 1.09%, to 5,476.50 after the Bank of England lowered its 2001 growth forecast, but said inflation would slow. In Germany, the DAX Index ended down 138.00 points, or 2.40%, to 5,614.51, on Cisco's warning that the tech slowdown could last for several months. In France, the CAC 40 finished off 65.39 points, or 1.29%, to 4,986.23.
In Asia, markets ended lower. After a strong showing in the previous session, the Nikkei 225 index stumbled again, ending down 155.79 points, or 1.26%, to 12,163.67. In Hong Kong, the Hang Seng stock index lost 49.18 points, or 0.41%, to 11,958.01.
By Amy Tsao in New York