Wall Street retreated Thursday after Federal Reserve Chairman Ben Bernanke predicted a “sluggish” economy until later in the year and more mortgage-related losses at banks. The Dow Jones industrial average fell 175 points.
Though the Fed chairman’s comments suggested the central bank is still open to further interest rate reductions, the tone was, as expected, somber. Bernanke said the housing and credit crises have weighed on the economy and curbed hiring. If the job market deteriorates, consumer spending, which is crucial for economic growth, will keep dwindling.
The Labor Department said Thursday the number of workers filing unemployment claims fell 9,000 to 348,000 last week. But after the January jobs report that showed the first net jobs loss in more than four years, Wall Street remains worried that businesses are becoming cautious about hiring and that unemployment will compound the debt problems that have been slamming the markets and the greater economy.
After three strong days on Wall Street, investors found scant encouragement in Bernanke’s testimony and cashed in their gains.
“He was more bearish on the economy than he was before,” said Arthur Hogan, chief market analyst at Jefferies & Co. After this week’s better-than-expected report on January retail sales, investors found Bernanke’s assessment of the economy particularly disheartening.
“To have the Fed come in and talk about how things could be getting worse, not better, kind of takes the wind out of their sails,” Hogan said.
According to preliminary calculations, the Dow Jones industrial average fell 175.26, or 1.40 percent, to 12,376.98.
Broader stock indicators also declined. The Standard & Poor’s 500 index fell 18.35, or 1.34 percent, to 1,348.86, and the Nasdaq composite index fell 41.39, or 1.74 percent, to 2,332.54.
Government bond prices dropped, pushing up the yield on the benchmark 10-year Treasury note, which moves opposite its price, to 3.83 from 3.73 percent late Wednesday.
Bond investors were focusing on Thursday’s upbeat jobless claims data, as well as Bernanke’s indication that the Fed may be nearing the end of its rate-cutting campaign if it expects the economy to regain momentum later in the year, said Joe Balestrino, a portfolio manager at Federated Investors Inc.
The central bank has been lowering key interest rates since September, and it usually takes six to nine months before rate moves affect the economy.
Banks fell on Bernanke’s testimony, and on a huge loss at the Switzerland-based bank UBS AG. UBS reported a fourth-quarter net loss of $11.28 billion due to investments in U.S. subprime mortgages. The bank, which posted its first full-year loss in a decade, said it expected more debt problems in 2008. Its U.S.-traded shares fell $3.05, or 8.3 percent, to $33.94.
Wall Street’s decline also reflected its underlying concerns about bond insurers, which are in danger of losing their superior ratings because of bad mortgage debt.
Late Wednesday, MBIA Inc. raised $1.1 billion from the sale of a nearly 40 percent stake in the company. Shares of the bond insurer rose 98 cents, or 8.4 percent, to $12.62.
MBIA told Congress Thursday it has enough cash to survive the distress in the industry, and that it needs neither a bailout nor tighter federal regulation. But lawmakers say action is necessary. New York regulators are working with banks and bond insurers on a plan to raise insurers’ cash levels.
Moody’s Investors Service downgraded another bond insurer, Financial Guaranty Insurance Co., to a financial strength rating of “A3” instead of “AAA.” The ratings agency said it believes the larger bond insurers MBIA and Ambac are “better positioned from a capitalization and business franchise perspective,” but that it is still reviewing its ratings on the two companies.
The dollar was mixed against other major currencies.
The weak dollar is, somewhat counterintuitively, helping to prop up the economy right now because U.S. goods are cheap for foreign buyers. The government reported Thursday that the nation’s trade deficit, which had ballooned to record levels for five straight years, finally narrowed in 2007. In December, the deficit dropped 6.9 percent to $58.8 billion, thanks largely to strong increases in U.S. exports.
High oil prices, however, are keeping the deficit from narrowing further. On Thursday, light, sweet crude oil rose $2.19 to $95.46 per barrel on the New York Mercantile Exchange.
Gold prices fell.
Declining issues outnumbered advancers by nearly 4 to 1 on the New York Stock Exchange, where volume came to 1.40 billion shares.
The Russell 2000 index of smaller companies fell 16.61, or 2.30 percent, to 705.32.
Overseas, Japan’s Nikkei stock average jumped 4.27 percent — its biggest advance in nearly six years — following strong economic growth figures and sizable gains on Wall Street on Wednesday. Britain’s FTSE 100 fell 0.01 percent, Germany’s DAX index fell 0.16 percent, and France’s CAC-40 rose 0.07 percent.