IT WAS a recipe for trouble.
Take three tech-company profit warnings. Mix in a melange of economic reports that raise doubts interest rates will be cut further. Then add in a special ingredient — a U.S. bombing in Iraq — and you've got something few traders could stomach.
As the bombardment of dizzying headlines ended, the Nasdaq Composite Index was down 127.53 points, or 5%, to 2425.38, returning all the gains of the previous two days and finishing the week 2% lower. The Dow Jones Industrial Average fell a milder 91.20, or 0.84%, to 10799.82, leaving it flat for the week. The S&P 500 lost 25.08, or 1.9%, to 1301.53. That broad market measurement finished the week down 1%.
While the technology sector tanked, the traders again did the rotation dance they've been doing for weeks — they bought defensive stocks that do well in tough economic times. Energy, utilities and food stocks all rose. (For a color-filled interactive view, see our Map of the Market for an interactive view of 600 stocks.)
Douglas Cliggott, the chief equity analyst at J.P. Morgan Securities, sees a cloudy outlook for stocks in the short term, especially the Nasdaq. "If we get a news flow like the current news flow, we will make a low below 2250, the low at the start of the year," he said. "The incremental bad news more than suggests that we're going to go down and hard in the next few weeks. It really strains credibility that things are going to improve by the end of the year."
Friday's troubles began with an earnings earthquake from Canada. Nortel Networks (NT), the Ontario-based telecommunications-equipment maker, issued a surprise warning Thursday night, saying it would lose money in the first quarter. It also sliced in half its 2001 forecast for revenue and earnings growth, saying the U.S. slowdown will continue well into the fourth quarter. Nortel's big customers, the telecom-services providers, are trimming back expansion plans more than expected, prompting it to slash its work force by 10,000. Nortel's shares plunged 33% and the trouble rippled through the networking sector, hitting the likes of fiber-optic player JDS Uniphase (JDSU), communications-chip maker Applied Micro Circuits (AMCC), and electronics-component maker Celestica (CLS).
Nortel competitor Lucent Technologies (LU) added to the malaise with new financial problems. The Wall Street Journal reported the company is having trouble lining up $6.5 billion in lending. Lucent's business has been eroding and it's under investigation by the government for revenue-reporting problems. The stock fell 7%.
Expected, but still troubling, news came from computer makers Dell (DELL) and Hewlett-Packard (HWP), which guided profit projections southward during their after-the-bell earnings reports Thursday. Dell, which missed lowered fourth-quarter profit predictions by a penny, said it would also miss numbers in the first quarter and announced plans to cut 4% of its work force. Hewlett met lowered predictions, but warned that a return to double-digit revenue growth won't happen this year.
If that isn't enough, the day's economic reports may give the Federal Reserve reasons to pause before another round of interest rate cuts. The January producer price index rose a dramatic 1.1% due to big increases in natural gas, tobacco and car prices. The core rate, which excludes volatile food and energy sectors, jumped by 0.7%. While some economists viewed the numbers as an aberration, another statistic also argued against lower rates. Housing starts in January rose a faster-than-expected 5.3%.
But wait. The University of Michigan's early February index of consumer sentiment came in at a weak 87.8, compared with expectations of 95. Federal Reserve Chairman Alan Greenspan has been following confidence closely these days and bulls hope this will embolden him to keep cutting sharply.
Bonds, which react more quickly to economic numbers than stocks, seemed to write off the inflation spike and focus more on consumer sentiment. Prices rose and yields fell. The 10-year note yielded 5.10% vs. 5.17% late Thursday. The 30-year bond slid to 5.46% from 5.49% late Thursday.
The final hit of the day came when news surfaced that U.S. and British planes struck Iraqi air-defense sites south of Baghdad. The attacks were an attempt to destroy radar systems threatening coalition aircraft enforcing the no-fly zones designed to limit Iraq's ability to make war, the Pentagon said. While all the planes returned safely, that didn't ameliorate the worries already present.
Larry Wachtel, market analyst at Prudential Securities, said the bombings shouldn't be a big problem for the market next week, but "Going into a three-day weekend, it enhanced reasons to stand aside." Traders were unlikely to buy ahead of a weekend, as Friday trends usually continue the first day back, he said. In addition, they'll have more time to stew over their losses this weekend as financial markets are closed Monday for President's Day.
Take three tech-company profit warnings. Mix in a melange of economic reports that raise doubts interest rates will be cut further. Then add in a special ingredient — a U.S. bombing in Iraq — and you've got something few traders could stomach.
As the bombardment of dizzying headlines ended, the Nasdaq Composite Index was down 127.53 points, or 5%, to 2425.38, returning all the gains of the previous two days and finishing the week 2% lower. The Dow Jones Industrial Average fell a milder 91.20, or 0.84%, to 10799.82, leaving it flat for the week. The S&P 500 lost 25.08, or 1.9%, to 1301.53. That broad market measurement finished the week down 1%.
While the technology sector tanked, the traders again did the rotation dance they've been doing for weeks — they bought defensive stocks that do well in tough economic times. Energy, utilities and food stocks all rose. (For a color-filled interactive view, see our Map of the Market for an interactive view of 600 stocks.)
Douglas Cliggott, the chief equity analyst at J.P. Morgan Securities, sees a cloudy outlook for stocks in the short term, especially the Nasdaq. "If we get a news flow like the current news flow, we will make a low below 2250, the low at the start of the year," he said. "The incremental bad news more than suggests that we're going to go down and hard in the next few weeks. It really strains credibility that things are going to improve by the end of the year."
Friday's troubles began with an earnings earthquake from Canada. Nortel Networks (NT), the Ontario-based telecommunications-equipment maker, issued a surprise warning Thursday night, saying it would lose money in the first quarter. It also sliced in half its 2001 forecast for revenue and earnings growth, saying the U.S. slowdown will continue well into the fourth quarter. Nortel's big customers, the telecom-services providers, are trimming back expansion plans more than expected, prompting it to slash its work force by 10,000. Nortel's shares plunged 33% and the trouble rippled through the networking sector, hitting the likes of fiber-optic player JDS Uniphase (JDSU), communications-chip maker Applied Micro Circuits (AMCC), and electronics-component maker Celestica (CLS).
Nortel competitor Lucent Technologies (LU) added to the malaise with new financial problems. The Wall Street Journal reported the company is having trouble lining up $6.5 billion in lending. Lucent's business has been eroding and it's under investigation by the government for revenue-reporting problems. The stock fell 7%.
Expected, but still troubling, news came from computer makers Dell (DELL) and Hewlett-Packard (HWP), which guided profit projections southward during their after-the-bell earnings reports Thursday. Dell, which missed lowered fourth-quarter profit predictions by a penny, said it would also miss numbers in the first quarter and announced plans to cut 4% of its work force. Hewlett met lowered predictions, but warned that a return to double-digit revenue growth won't happen this year.
If that isn't enough, the day's economic reports may give the Federal Reserve reasons to pause before another round of interest rate cuts. The January producer price index rose a dramatic 1.1% due to big increases in natural gas, tobacco and car prices. The core rate, which excludes volatile food and energy sectors, jumped by 0.7%. While some economists viewed the numbers as an aberration, another statistic also argued against lower rates. Housing starts in January rose a faster-than-expected 5.3%.
But wait. The University of Michigan's early February index of consumer sentiment came in at a weak 87.8, compared with expectations of 95. Federal Reserve Chairman Alan Greenspan has been following confidence closely these days and bulls hope this will embolden him to keep cutting sharply.
Bonds, which react more quickly to economic numbers than stocks, seemed to write off the inflation spike and focus more on consumer sentiment. Prices rose and yields fell. The 10-year note yielded 5.10% vs. 5.17% late Thursday. The 30-year bond slid to 5.46% from 5.49% late Thursday.
The final hit of the day came when news surfaced that U.S. and British planes struck Iraqi air-defense sites south of Baghdad. The attacks were an attempt to destroy radar systems threatening coalition aircraft enforcing the no-fly zones designed to limit Iraq's ability to make war, the Pentagon said. While all the planes returned safely, that didn't ameliorate the worries already present.
Larry Wachtel, market analyst at Prudential Securities, said the bombings shouldn't be a big problem for the market next week, but "Going into a three-day weekend, it enhanced reasons to stand aside." Traders were unlikely to buy ahead of a weekend, as Friday trends usually continue the first day back, he said. In addition, they'll have more time to stew over their losses this weekend as financial markets are closed Monday for President's Day.
