Stocks drop

jobs strong

Sharp sales decline predicted by Intel topples tech shares

Nasdaq index falls 5%

Employment figures hint strong economy

Fed unlikely to act

March 10, 2001|By William Patalon III | William Patalon III,SUN STAFF

Stocks were pounded yesterday - with the Nasdaq composite index plunging more than 5 percent - after Intel Corp. warned of a steep drop-off in sales while an employment report showed that the economy might be too strong for the Federal Reserve to cut interest rates as quickly and steeply as investors might like.

This double whammy of bad news sent the technology-heavy Nasdaq index down 115.95 points, or 5.35 percent, to close at 2,052.78. The Dow Jones industrial average skidded 213.63 points, or 1.97 percent, to end at 10,644.62.

The Nasdaq is down 59 percent from its record high of 5,048.62, reached a year ago today.

"The economy's not in such bad shape as some people had anticipated, so the chances of a very aggressive move by the Fed have diminished a bit," said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein. "Investors in the stock market might have been hoping for the Fed to save the day."

The Labor Department reported that 135,000 jobs were created last month, almost double the forecast of 75,000, according to analysts surveyed by Bloomberg News.

Hourly earnings climbed 0.5 percent, which also was higher than the 0.3 percent projected by economists. The U.S. unemployment rate held steady at 4.2 percent from January to February.

With stocks experiencing their worst bear market in years, investors have been praying for a quick series of steep and successive reductions in short-term interest rates by the nation's central bank, since falling interest rates have historically been a cure-all for falling stock prices, analysts say.

Between June 1999 and May 2000, the Fed boosted borrowing costs on six occasions in hopes of slowing a galloping economy and corralling inflationary pressures.

Those rate increases ultimately helped crush stock prices, especially in the technology sector, where share values had soared far in excess of what many analysts said was any possible rational measure.

Fed reverses course

But in the opening month of the new year, with stock prices in the dumper and the economy sputtering so badly that recession fears reached their greatest peak in a decade, the central bank reversed course and twice slashed interest rates by a half percentage point - the first time during Fed Chairman Alan Greenspan's 13-year tenure that it cut rates by a whole percentage point in a single month.

Investors, however, clearly wanted more and have been hoping for yet another half-point rate cut ahead of the next meeting of Fed policymakers, slated for March 20.

Yesterday's strong jobs report might well keep central bankers leery of reducing interest rates at that meeting of the policymaking Federal Open Market Committee, economists said.

Recession less likely

The larger-than-predicted expansion of the job rolls is a strong indicator that the nation's $10 trillion economy is not teetering on the brink of recession, as was widely believed less than two months ago.

And that gives the central bank the luxury of waiting a bit longer to see how the economy reacts to the first two rate decreases before borrowing costs are taken lower.

"Economists in the recession camp were quieted this morning with the news of [the] greater-than-expected increase in February nonfarm payrolls," said Richard Yamarone, director of economic research for Argus Research Co. in New York City.

"The surprising surge has sent the signal to the markets that the economy is not as weak as many have made it out to be, and that the Federal Reserve will forgo an inter-meeting rate cut."

Rate increases slow the economy by raising borrowing costs, which eat into corporate profits and cause consumers to rethink the big-ticket purchases that bulk up corporate coffers. Rate decreases leave more money in consumer pocketbooks - in essence, giving them more to spend - which is key because consumer spending accounts for two-thirds of all U.S. economic activity.

And since lower interest rates also help pare corporate expenses, rate decreases help boost profits - a key catalyst of higher stock prices.

Right now, however, the U.S. economy is clearly laboring under the burden of the higher level of interest rates that the Fed engineered in the second half of 1999 and first half of last year.

Take Intel. The chipmaking giant said late Thursday that it would cut 5,000 jobs, chiefly through attrition, and simultaneously warned that first-quarter sales would be down 25 percent from the fourth quarter total of $8.7 billion - far greater than its previous estimate of a 15 percent drop-off.

Further declines

Intel shares fell $2.31, or 7 percent, to $30.94 in after-hours trading Thursday, and then declined by $3.81 yesterday, closing at $29.44. A widely held and closely followed stock that's viewed as a key proxy of the semiconductor sector - if not the entire high-tech sector - Intel's bad-news revelation was enough to roil the entire stock market, including the blue-chip Dow, of which it is a member, analysts say.

"Intel is a stalwart," said Patrick Buttarazzi, an assistant vice president of investments with the downtown office of Prudential Securities Inc. "Institutions, mutual funds ... everybody owns Intel."

Bloomberg News contributed to this article.

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