msnbc.com staff and news service reports
updated 10/6/2005 7:13:06 AM ET 2005-10-06T11:13:06

Stocks fell sharply for a second straight day Wednesday as investors showed growing nervousness about rising interest rates and weak corporate earnings in the wake of Hurricane Katrina.

Major Market Indices

The Dow Jones industrial average, which fell nearly 100 points Tuesday, lost another 123.75 to close at about 10,317, its lowest level in three months. Most of Wednesday's losses came in the final hour of trading.

"There are a lot of folks talking about nothing new, but the culmination of a lot of worries," said Art Hogan, chief market analyst at Jefferies & Co. "There are a lot of major headwinds not going away soon."

Stocks opened lower and extended their losses when the Institute for Supply Management reported that its non-manufacturing business index , which measures service sector activity, fell surprisingly sharply to 53.3 in September from 65.0 in August.

Investors also were weighed down by the latest comments indicating the Federal Reserve is likely to continue raising interest rates higher and longer than previously expected.

And with third-quarter earnings season about to get under way, investors are bracing themselves for a slew of companies to fall short of expectations because of higher energy prices and other fallout from Hurricanes Katrina and Rita.

"With all the headwinds and all the arguments you can make against stocks, its hard to find a very good catalyst to stay involved," Hogan said. "There is more bad news than good news out there."

One worrisome sign is that energy shares, which have been a cornerstone of this year's stock market rally, are beginning to show signs of fatigue.

Dow component Exxon Mobil Corp. fell $1.60 or 2.6 percent to close at $58.95 as crude oil traded in New York fell $1.11 to settle at $62.79 per barrel.

Comments from Kansas City Fed President Thomas Hoenig also weighed on the market. Hoenig said the economy will have grow solidly into 2006 and beyond despite the hurricanes. He also said that even before Hurricane Katrina, the U.S. economy was starting to see significant impacts from energy costs.

Investors were still fretting about Tuesday’s comments from Dallas Federal Reserve Bank President Robert Fisher , who said inflation was nearing the high end of the Fed’s comfort zone — a clear signal that the Fed’s short-term interest rate hikes would continue.

Bonds rose, with the yield on the 10-year Treasury note falling to 4.36 percent from 4.38 percent late Tuesday. The U.S. dollar was lower against other major currencies in European trading.

“We need to get (earnings season) out of the way and see how companies are doing,” said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee.

Small-cap stocks, which are highly sensitive to interest rates, dropped sharply Wednesday. The Russell 2000 index of smaller companies fell nearly 3 percent.

Investors are facing a Wall Street nightmare: A slower economy and higher interest rates.
Those looking for signs of a slowdown are finding them. For instance, home equity lending at banks has slowed from a peak rate of $2 billion to $3 billion a week to “a trickle” of $100 million in the past several weeks, according to a Citigroup report.

“There’s just a lot of nervousness and cross-currents,” Berman said.

One example: Home builder Hovnanian Enterprises Inc. fell $1.09 to $48.19 despite its report that new contracts rose 61.5 percent in September. Investors are concerned that the steep run-up in housing prices is starting to stall as interest rates climb; those fears were compounded by a New York Times report Tuesday that insiders in home building companies have sold, in aggregate, almost $1 billion of the companies’ stock this year.

Other home builders also dropped. D.R. Horton Inc. fell 84 cents to $34.36; KB Home fell $2.95 to $67.46 and Toll Brothers, Inc. fell 92 cents to $40.48.

Utility operator Entergy Corp. fell $2.21 to $72.21 after it said the damage it suffered from Hurricane Rita will range from $400 million to $550 million, a bill that comes on top of damages that could hit $1.1 billion from Hurricane Katrina.  Entergy’s New Orleans unit filed for bankruptcy protection after Katrina, citing the loss of most of its customer base.

Wendy’s International Inc. rose 61 cents to $47.33 even though it said third-quarter same-store sales fell 5 percent at its flagship chain, as high gas prices curbed consumer spending and hurricanes shuttered restaurants. Investors are excited by the planned initial public offering of its Tim Hortons chain.

Declining issues led advancers by more than 5 to 1 on the New York Stock Exchange, where volume was 1.74 billion, up from 1.55 billion during the same point of the pervious session.

MSNBC.com's Martin Wolk, Reuters and The Associated Press contributed to this report.

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