Stocks fell moderately Monday as Wall Street anxiously awaited the Federal Reserve’s impending decision on interest rates.
The market is betting on a rate cut from the Fed when the central bank meets Tuesday, but investors are not completely sure what it will do and what it will say in its accompanying economic statement. Furthermore, with the major brokerages’ third-quarter results yet to be released, investors are uncertain about how badly the summer’s stock downturn, souring home loans, and credit squeeze hit the banking industry.
Adding to the uneasiness, Northern Rock PLC, Britain’s fifth-largest mortgage lender, saw its stock plunge and customers withdraw billions of dollars after it issued a profit warning Friday and drew on emergency funds from the Bank of England. That gave U.S. investors an added impetus to pare their stock holdings, particularly in the financial sector.
Talk from former Fed Chairman Alan Greenspan of the possibility of a recession amid high inflationary pressures also elevated Wall Street’s jitters, as did job cuts at Merrill Lynch & Co.’s First Franklin Financial Corp.
It’s possible the Fed won’t go through with a rate cut at all if it believes the economy is still growing moderately and that inflation remains a threat, but most investors expect the Fed to cut the bench mark federal funds rate by at least a quarter-point. And because negative economic data have trickled in over the last couple weeks — such as a decrease of 4,000 jobs in August and weaker-than-expected retail sales — some anticipate a half-point rate cut.
“A quarter-point is going to be disappointing. It’s already priced in,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. But the Fed probably won’t want to lower rates by more than that, he said, and the central bank may not indicate in its statement that more reductions are in the offing.
“The big issue is gold and oil have been spiking higher, which people could argue is inflationary, but economic data has been weak. The Fed’s in a tough place.” Higher interest rates prevent costs from rising; lower rates fuel growth but also tend to accelerate inflation.
According to preliminary calculations, the Dow Jones industrial average fell 39.10, or 0.29 percent, to 13,403.42.
Broader stock indicators showed somewhat steeper losses. The Standard & Poor’s 500 index fell 7.60, or 0.51 percent, to 1,476.65, and the Nasdaq composite index lost 20.52, or 0.79 percent, to 2,581.66. The Russell 2000 index, which tracks small company stocks, fell 7.68, or 0.98 percent, to 775.81.
Bonds rose modestly, pushing the yield on the 10-year Treasury note down to 4.47 percent from 4.48 percent late Friday.
Volume on the New York Stock Exchange was among the lightest of any day this year, indicating that many market participants were staying on the sidelines ahead of the Fed’s decision. Some 1.11 billion shares were traded, down from 1.2 billion on Friday.
Declining issues outnumbered advancers by more than 2 to 1 on the NYSE.
Last week, stocks saw sizable gains, due largely to high expectations of a rate cut. The Dow ended up 2.51 percent, the Standard & Poor’s 500 index rose 2.11 percent, and the Nasdaq composite index rose 1.42 percent. The Dow is just 4 percent below its all-time high of 14,000.41, reached in July before fears escalated about bad home loans and excessive leveraged debt.
The prospect of a recession has been keeping the markets volatile.
Greenspan said in an interview with NBC before the markets opened Monday that the risk of a recession is higher than it was at the beginning of the year, but not by much.
Meanwhile, U.S. Treasury Secretary Henry Paulson said in Paris that regulators should not rush to impose new rules on the market because of the recent tightening in credit.
“There’s tremendous growth going on in many parts of our world economy, and that’s driving a lot of business here in the U.S.,” said Rob Lutts, chief investment officer of Cabot Money Management, noting that the markets are very focused on the U.S. housing market right now. “I’m not going to say let’s not worry, but let’s put it in perspective.”
The dollar rose versus the pound and euro but fell against the yen. Gold jumped.
Crude oil prices rose $1.47 to settle at a record $80.57 per barrel on the New York Mercantile Exchange. Crude closed over $80 for the first time last week; oil futures also set a trading record Monday, moving as high as $80.70.
Later in the week the major investment banks — Bear Stearns Cos., Lehman Brothers, Morgan Stanley and Goldman Sachs Group Inc. — release their fiscal third-quarter results. On Monday, Bear Stearns fell $1.81 to $115.38; Lehman fell 88 cents to $58.62; Morgan Stanley fell $1.20 to $64.91; and Goldman fell $2.98 to $187.61.
Merrill fell $1.83, or 2.5 percent, to $72.82, after saying it was eliminating an undisclosed number of jobs.