Stocks dove deep into the red in the final minutes of trading Tuesday, when Federal Reserve Chairman Alan Greenspan commented that the banking system is well positioned for an eventual rate hike. The Nasdaq lost more than 2%.
Rate hike concerns helped offset some strong March-quarter earnings news on one of the busiest earnings release days so far.
The Dow Jones industrial average dove 123.35 points lower, or 1.2%, to finish at 10,314.50. The broader Standard & Poor's 500-stock index shed 17.73 points, or 1.59%, to 1,118.09. The tech-heavy Nasdaq composite index lost 41.8 points, or 2.11%, at 1,978.63.
Automotive sectors helped to support some upside during the day. But rate-sensitive sectors such as multi-line insurance, investment banking, thrifts and mortgages, and REITs were lower as the market digested Greenspan's testimony.
Markets turned deeply south as soon as it heard Greenspan's comments before the Senate Banking Committee in Washington, D.C. about banks' readiness to absorb rate hikes, and that deflation is no longer an issue. Greenspan added that if productivity remains strong, inflationary pressures will be reasonably contained. During the Q&A that followed, he mentioned that pricing power is returning and he is confident about jobs doing the same.
"With inflation contained, there is no need for rapid rate hikes, but otherwise, this description does not seem to warrant a 1% funds rate for much longer," says economic research outfit Informa Global Markets.
Tomorrow, Greenspan begins his testimony to the Joint Economic Committee about the state of the economy at 10 a.m. EST. Later in the day, the Federal Reserve's Beige Book will be released.
The market's earlier lack of response to relatively good earnings wasn't surprising, says Larry Wachtel, market analyst at Wachovia Securities. "You can see that the market is tiring, the technicals are poor," he says. "It isn't like there's a big rush out, there's just a caution about getting in." As for expecting any big gains in the weeks to come, Wachtel takes a longer-term view: "if we go up another 5% to 7% in the rest of the year, that's a big deal."
In earnings news, drug maker Pfizer (PFE ) reported slightly-better-than expected first-quarter results. Pfizer says net income was 30 cents per diluted share, vs. 76 cents a year ago, as non-cash charges and costs offset a 47% revenue rise. Pfizer lost 2.3%.
Car maker General Motors (GM ) rose 3.5% after the company posted first-quarter earnings per share of $2.25, vs. $1.84 (excluding items), on a 3.1% revenue rise. Reflecting a robust U.S. market, GM raised its 2004 EPS guidance to about $7.00, excluding items.
Among telecom shares, J2 Global Communications (JCOM ) helped lead gains -- up 14% -- after posting strong first-quarter earnings of 25 cents, vs. 20 cents, (GAAP) on a 51% revenue rise. The company sees its second-quarter earnings as high as 28 cents per share, on revenue as high as $25.4 million.
AT&T Wireless (AWE ) says that its first-quarter services revenue was $3.746 billion, essentially flat with last year's $3.743 billion. AT&T says that its gross subscriber additions exceeded two million for the third consecutive quarter and that net subscriber additions were disappointing, down 367,000. The shares finished higher.
Sprint (FON ) ended higher after the company posted first-quarter earnings of 34 cents, vs. 31 cents from continuing operations, as lower operating costs offset 4% lower net operating revenue. S&P reiterated its avoid rating.
Lucent (LU ) posted second-quarter earnings of 2 cents (GAAP), vs. a 14-cent loss, as lower operating expenses offset a 9% revenue drop. Lucent expects its annual revenue to increase on a percentage basis in the low single digits for the fiscal year. S&P maintained its hold rating of Lucent. The stock fell 10%.
Wells Fargo (WFC ) moved lower after reporting diluted earnings per share of $1.03 in its first quarter, vs. 88 cents, on 7% higher revenue.
Toymaker Mattel (MAT ) disappointed investors by posting first-quarter earnings of 2 cents per share, vs. 7 cents, as cost pressures, investment in growth, and improvement initiatives offset a 4.8% sales rise. The shares dipped lower.
The earnings calendar remains very heavy this week. Wednesday brings news from Coca-Cola (KO ), eBay (EBAY ), Ford (F ), JP Morgan Chase (JPM ), Qualcomm (QCOM ), and SBC Communications (SBC ).
On Thursday, Amazon.com (AMZN ), AIG (AIG ), AT&T (T ), Merck (MRK ), Microsoft (MSFT ), Nextel Communications (NXTL ), among others, report earnings. Friday's earnings releases include International Paper (IP ), Schlumberger (SLB ), and Xerox (XRX ).
The economic calendar is on the light side this week, with weekly jobless claims on Thursday, and durable goods orders on Friday.
Treasury prices sank Tuesday, with a fresh round of selling emerging as soon as Greenspan made reference to deflation not being a non-issue. The 2-year note yield rose nine basis points, and the 10-year note traded up to 4.45% yield.
The dollar was high all day, but gained ground after Greenspan's comments. The British pound was at $1.78, and the euro was at $1.18.
On Wednesday, all eyes will be on Greenspan, and ears tuned to other Fedspeak. "Treasuries are likely to stay skittish as a result, with retail continuing to refrain from any major participation," says Informa Global Markets.
European stock markets finished higher on Tuesday. London's Financial Times-Stock Exchange 100 index added 22.8 points, or 0.5%, to 4,569. Traders were encouraged by a report that Britain's CPI inflation has fallen to a nine-month low, but many remain worried that housing market speculation is turning into a bubble that will hurt economy when it bursts, reports S&P's MarketScope. HSBC, Royal Bank of Scotland, Lloyds Bank, and HBOS were higher.
Germany's DAX index finished up 36.06 points, or 0.9%, to 4,061.13. Traders were ignoring the ZEW institutional investor and analyst sentiment survey, which fell to 49.7 in April - the lowest level since July - from 57.6 in March. DaimlerChrysler, Siemens, and SAP were higher.
In Paris, the CAC 40 index moved 30 points higher, or 0.8%, to 3,773.43. Television Francaise 1 was higher after reporting higher first quarter ad revenue.
Asian markets finished mixed on Tuesday. In Japan, the Nikkei 225 index finished 188.05 points higher, or 1.6%, to close at 11,952.26. Banks rebounded from their sharp falls on Monday, and tech stocks benefited from the rises in U.S. tech stocks overnight.
In Hong Kong, the Hang Seng index lost 55.63 points, or 0.45%, to close at 12,394.37.