Negative White House forecast sees stocks slump
Stocks slumped in the United States today as the Bush administration said the country’s economy would likely grow at a slower pace than forecast six months ago – an assessment that eclipsed positive corporate news and lower oil prices.
The White House expects the economy to continue growing at a 3.4% rate, a fraction less than the 3.5% pace predicted in December.
In addition, rising energy prices prompted the administration to increase its inflation forecast for the year.
The report was a further distraction for investors, who were already leaning towards the sidelines ahead of congressional testimony by Federal Reserve Chairman Alan Greenspan. Still, analysts remained optimistic about the market’s long-range outlook.
“I think everybody is already accustomed to the fact that the economy is not going to grow at the same fast clip it did a few years ago,” said Thomas F. Lydon Jr, president of Global Trends Investments in Newport Beach, California.
“This move, which is just a tenth of a point, is not a big surprise for most people, or we would’ve seen a bigger sell-off at the close.”
The Dow Jones industrial average slid 6.21, or 0.06%, to 10,476.86, after spending most of the day in positive range.
The broader gauges also closed lower. The Standard & Poor’s 500 index was down 2.59, or 0.22%, at 1,194.67. The Nasdaq composite index fell 6.98, or 0.3%, to 2,060.18.
The US dollar saw a late-day rebound against the euro ahead of Greenspan’s remarks to Congress on Thursday. Bonds fell slightly, with the yield on the 10-year note rising to 3.94% from 3.92% late Tuesday.
Crude oil skidded 1.22dollars to settle at 52.54dollars per barrel on the New York Mercantile Exchange, reversing gains made after a weekly government report on fuel inventories showed an unexpected 3 million-barrel draw on crude; analysts had expected a build.
Gasoline inventories were also down, though supplies of distillate fuels rose.
Pricey oil and anxiety over the strength of the economy have kept stocks in a trading range recently, but the idea that the Fed might soon end the rate tightening cycle has brightened sentiment.
A halt to the rate rises would create a more stable business environment, which would bode well for the rest of 2005.
If investors do get a clear signal that the final rate hike is in sight, it would be a positive catalyst for stocks, said Susan L. Malley, chief investment officer for Malley Associates Capital Management in New York.
“Stock valuations now are good, profits are still good. We’d all love it if economic growth were a little more robust, but it’s still above trend growth,” Malley said. ”We’re still expecting a positive year, and we are optimistic that when it seems like the end to rate increases is coming, that will be a positive for stocks.”
In company news, General Motors rose 4.2%, or 1.29, to 32.02, after billionaire investor Kirk Kerkorian’s Tracinda Corp. boosted its stake in the automaker to 7.2%, having purchased 18.9m shares as part of a tender offer. Kerkorian had been seeking to purchase up to 28m GM shares at US$31 apiece.
Also on the Dow, Caterpillar Inc. added 2.2%, or 2.05, to 96.58, as analysts at Prudential raised the stock’s rating to “overweight.”
Texas Instruments was up 62 cents at 27.90 after the chipmaker raised its second-quarter earnings forecast and narrowed its revenue outlook, citing higher demand for semiconductor products and seasonal growth for educational calculators.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange.
Volume was at 1.33bn shares, compared with 1.44bn traded at the same point Tuesday.
The Russell 2000 index, which tracks smaller company stocks, was down 3.31, or 0.53%, at 620.47.
