Stocks’ Rally Falters; Bond Yields Pull Back

The Fed rally sputtered Thursday as major U.S. stock indexes fell the day after the Federal Reserve shocked the world with interest rate cuts.

The Nasdaq composite index ended down 49.86 points, or 1.9%, at 2,566.83 after surging 324.83 points Wednesday when the Fed caught traders off guard by cutting rates. The 14.2% jump was the tech-laden index’s biggest one-day gain.

The Dow Jones industrial average fell 33.34 points, or 0.3%, to 10,912.41 after rallying more than 299 points, or 2.8%, on Wednesday for its biggest gain in two months. The broader Standard & Poor’s 500 index slipped 1.1% after Wednesday’s 5% surge.

Although the major indexes were in the red, market breadth was narrowly positive. Winners outnumbered losers by 16 to 14 on the New York Stock Exchange and by 22 to 18 on Nasdaq.

Trading volume set a record on the New York Stock Exchange as more than 2.4 billion shares changed hands.

The big rally Wednesday reflected investors’ perceptions that a half-percentage-point rate cut by the Fed in its key federal funds rate, the rate for overnight bank loans, would jump-start the slowing U.S. economy. The new rate is 6%.

After the markets closed Thursday the Fed continued its rate cutting by reducing the largely symbolic discount rate--what it charges banks for loans--by a quarter-point, to 5.5%. The central bank had cut that rate a quarter-point Wednesday but needed requests from its regional banks to authorize another reduction.

Investors may see more evidence of the economy’s slowdown today, when the government reports on December employment trends.

A Reuters survey showed economists expect U.S. payrolls grew by 102,000 in December. The unemployment rate is forecast to rise to 4.1% from November’s 4%.

Thursday’s economic news was inconclusive. The number of Americans filing new claims for state unemployment insurance climbed to its highest level in more than two years, providing additional evidence of a weakening economy. But orders to U.S. factories rose 1.7% in November, reflecting increased demand for airplanes and electronics. Still, that wasn’t enough to recover the revised 4% loss for October, even weaker than the original estimate.

Traders said the lack of significant follow-through in the stock market Thursday showed investors are worried the Fed could be too late to stave off recession.

“Investors awoke to realize the reason the Fed lowered rates the way they did is because the economy is fairly soft,” said Charles G. Crane, strategist for Spears, Benzak, Salomon & Farrell in New York. “As exciting as it was to have rates cut, that is not going to prop up [corporate] profits in the immediate future.”

Many of the technology stocks that had rocketed Wednesday surrendered some of those gains Thursday. Broadcom, up $30.81 Wednesday, fell $6.69 to $100.25. Other losers included Qualcomm, down $5.13 to $78.94; Internet gear maker Juniper Networks, off $6.69 to $125.31; and Tibco Software, down $6.88 to $36.13.

Some tech shares continued to gain. Gateway surged $2.85 to $21.75, EMC rose $2.88 to $70.69, America Online jumped $4.68 to $42.18 and Computer Associates rose $4.56 to $25.88.

Investors continued to snap up shares of banks, which are viewed as beneficiaries of lower interest rates. J.P. Morgan Chase rose $1.38 to $52 and Bank of America gained $1.56 to $51.50.

But many insurance stocks plunged, led by American International Group, down $6.94 to $89.

Likewise, investors again hammered many of the “defensive” stock sectors that had been market stars as Wall Street searched for safe havens last year.

Drug stocks were broadly lower, led by Merck, off $4.13 to $85. Food and other consumer product shares also tumbled.

Utilities slid amid investors’ rising concern over the fate of California’s two major power producers. The Dow utilities index fell 5.9%.

Retailing stocks were mixed following several companies’ reports that holiday sales slumped.

“The assumption is that the consumer is going to be an immediate beneficiary of lower rates and will have more disposable income and that is going to help those stocks,” said Barry Berman, trader for Robert W. Baird & Co. in Milwaukee.

Abercrombie & Fitch climbed $2.50 to $22.75, although the trendy clothing retailer said December sales dropped 11% from last year. Sears was up 40 cents at $36.43, despite saying that December sales fell 1.1% and that it is closing 89 stores.

While many safe-haven stocks were sold, money poured back into Treasury bonds, sending yields down again. The yield on the 10-year Treasury note fell to 5.02% from Wednesday’s 5.16%.

In currency trading the euro was trading near 95 U.S. cents, a sharp gain of more than 2% from its previous close.

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Market Roundup, C6-7