Stocks Retreat on Economy Worries, Cisco Warning

Stocks fell and bond yields plunged Thursday as investors took a skeptical second look at the Federal Reserve’s surprisingly steep interest cut, which touched off a rally on Wall Street the day before.

“The Fed’s move has not necessarily improved confidence,” Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said of the policymakers’ decision Wednesday to cut their key borrowing rate by a half of a percentage point.

“The Federal Reserve has telegraphed to the world that the U.S. economy is so bad that interest rates have to be cut a whopping” half point, he said.

The Dow Jones industrial average fell 184.77 points, or 2.1%, to 8,586.24, snapping a four-day winning streak. The broader Standard & Poor’s 500 index slipped 21.11 points, or 2.3%, to 902.65 and the tech-heavy Nasdaq composite sank 42.28 points, or 3%, to 1,376.71.

Losers outnumbered winners by 2 to 1 on the New York Stock Exchange and on Nasdaq in active trading.

The yield on the benchmark 10-year Treasury note fell to 3.88% from Wednesday’s close of 4.03%, as traders shifted assets out of stocks and into bonds. The 10-year T-note yield has been falling back toward the 44-year low of 3.57% it reached Oct. 9.

Reassessment of the Fed’s bold move was only one of several factors contributing to the day’s stock slide, analysts said.

Cisco Systems’ earnings announcement late Wednesday -- in which the networking giant said the revenue outlook remains weak -- spurred selling in big tech names. Cisco slid 61 cents to $12.35, IBM dropped $2.59 to $78.95, Hewlett-Packard lost 79 cents to $16.72 and Microsoft slipped $1.02 to $56.01.

The indictment Thursday of Westar Energy’s CEO on bank fraud charges put the issue of corporate malfeasance back in the spotlight, sending the firm’s shares reeling. Although it was unclear whether the indictment was related to Westar’s operations, the firm’s stock sank $2.35 to $8.50 before the NYSE issued a midday trading halt.

Meanwhile, a “reinvigorated” President Bush -- whose party took control of both congressional houses in Tuesday’s election -- rattled nerves by issuing another warning to Iraq regarding weapons inspections, said Reg Gipson, president of L.A.-based Alpha Analytics Investment Group.

“All these factors reminded investors that what ails the economy unfortunately cannot be cured by the Fed,” he said.

What’s more, the market may simply have been due for a breather after its recent run-up, said James Midanek, partner in the Walnut Creek, Calif.-based investment firm Midanek/Pak Advisors. From its five-year low Oct. 9 through Wednesday, the Dow rose 20.4%.

Midanek also said a Labor Department report showing that productivity grew at a brisk 4% annual rate in the third quarter may have unnerved some. Though productivity helps keep inflation in check, he said the report may have added to the increasingly loud “deflation” buzz.

In other highlights:

* J.P. Morgan lost $1.46 to $20.60 amid rumors about potential losses in its derivatives trading. The company called the speculation “false and irresponsible.” Other bank stocks fell in reaction to lower interest rates, which can chip into profits, including Citigroup, off $1.44 to $36.45, and Wells Fargo, down $1.44 to $47.21.

* Homebuilders slumped after CS First Boston downgraded the sector, saying the housing boom may have peaked. Centex slid $3.04 to $44.92, Toll Bros. fell $1.49 to $20.20 and Calabasas-based Ryland Group lost $3.80 to $38.40.

* European indexes fell, including a 4.3% drop in Germany and a 3.2% slide in France, in advance of the European Central Bank’s decision to leave interest rates unchanged.

Market Roundup, C5-6