Stocks fell Tuesday, as investors ignored some upbeat consumer confidence data and took profits from a rally in Monday's session that drove the Dow Jones industrial average to its highest level since the summer before the Sept. 11, 2001, terrorist attacks.
Strong corporate earnings, encouraging economic data and an expression of confidence about the overall jobs picture from U.S. Federal Reserve Chairman Alan Greenspan helped the Dow industrials and the tech-rich Nasdaq Composite index to close Monday at highs not seen in more than 2-1/2 years.
“I think Greenspan’s comments about jobs fuelled the market’s upside momentum yesterday, and now we’re seeing some profit-taking,” said Peter Cardillo, chief strategist at Global Partners Securities, referring to remarks made at an economic conference in London, in which the Fed chief said he is confident that jobs lost in the latest recession will return.
“I think we’re looking at a pull-back of 5 percent over the next few weeks,” Cardillo added.
By the close of trading, the Dow index was down 92.59 points, or 0.9 percent, at 10,609.92, erasing two-thirds of its 134-point rally in Monday’s session.
Broader stock indices also fell. The Nasdaq composite closed Tuesday down 37.79 points, or 1.8 percent, at 2,116.04, erasing all of the gains it made on Monday. The Standard & Poor's 500-stock index fell 11.33 points, or 1 percent, to 1,144.05.
Wall Street looks to Fed
Stock prices are up over 40 percent after a 10-month rally, and many market analysts are predicting stocks will soon give up some of their gains. Some have said fourth-quarter earnings season, which is expected to show healthy profits for corporate America, will give investors an excuse to take some money off the table.
Earnings reporting season is at its height and the vast majority of companies that have reported results have solidly beaten Wall Street's expectations. But instead of selling on the news, investors have continued to push stocks higher in recent weeks, albeit more unevenly.
“Just like everyone else, I thought stocks would trade down on a buy on the rumor, sell on the fact scenario, but it hasn’t happened,” said Kent Engelke, markets strategist at Anderson & Strudwick.
“I’d be more comfortable if we had some substantial profit-taking,” he added. “But the market is trading as though earnings will exceed expectations in 2004 and the year will be a good one for stocks.”
Investors are looking ahead to the conclusion of the Federal Reserve’s Open Market Committee meeting on Wednesday afternoon.
The Fed began a two-day meeting on interest rates early Tuesday, and is expected to issue a policy statement at the end of the meeting. Most investors expect the Fed to keep interest rates unchanged at four-decade lows, and reiterate its recent statements that it does not plan to keep rates low for a considerable period.
“The Fed’s policy statement will be scrutinized, and I also think investors will want to hear what policy makers think of the job market after Greenspan’s statement yesterday. But overall, I think the rate meeting will be benign,” said Peter Cardillo.
Earlier Tuesday, stocks shrugged off news of an increase in a key gauge of U.S. consumer confidence, but the data lifted bond prices.
The Conference Board, a business group, said its key index of U.S. consumer sentiment strengthened in January, rising to a reading of 96.8 -- its highest level since mid-2002 -- following a dip in December. The data missed analysts’ forecasts.
Profit surges at DuPont
Four members of the Dow 30 index led Tuesday’s earnings parade.
Chemical giant DuPont reported an 82 percent rise in fourth-quarter profits, beating analyst expectations despite higher prices for oil and natural gas. The sale of a textiles unit helped boost the firm’s bottom line.
Caterpillar, another Dow member, beat Wall Street's estimates with rising volume and prices in its machinery and engines segments. Favorable currency rates also helped the global heavy equipment company, which raised its sales forecast for this year.
Dow member McDonald's posted a modest profit for the fourth quarter, meeting expectations. The fast food retailer, in the midst of a restructuring, posted strong sales and operating results late Monday, showing no ill effects from the mad cow scare.
And pharmaceutical company Merck reported lower profits and sales for the fourth quarter, partly due to restructuring costs and a new U.S. wholesaler distribution program.
Defense contractors Lockheed Martin and Raytheon also reported earnings Tuesday, posting fourth-quarter profits after year-ago losses. But chip equipment maker Novellus Systems weighed on the broader semiconductor sector after warning that business conditions in the current quarter could weaken.
Shares of Novellus fell 14.5 percent to $34.40 on the Nasdaq market and pressured the rest of the chip sector, pushing the Philadelphia Stock Exchange’s semiconductor index down 4.2 percent.
Shares of Amazon.com fell 2.3 percent to $55.74 Tuesday ahead of the release of the online retailer’s quarterly earnings, which were released after the close. Amazon posted a higher quarterly profit, fueled by its busiest holiday season to date.
Overseas, Japan's Nikkei average finished Tuesday 0.4 percent lower, while Europe’s major stock averages were slightly higher.
The dollar fell to a new three-year low Tuesday and traded at 1.2629 dollars to the euro and 105.64 yen to the dollar, compared with 1.2471 dollars and 106.33 yen late Monday in New York.
Reuters and the Associated Press contributed to this story