Dow falls 143 NEW YORK -- Stocks fell sharply today as concern that Asia's recession will hurt corporate profits came on top of report showing a slowing U.S. economy.
as GM, Asia
slow economy
The GDP is up 1.4% in
the second quarter after
a previous 5.5% gainThe Dow Jones industrial average sank 143.66, or 1.6 percent, to 8,883.29.
"Half of the companies that came out with decent earnings warned that the second half might be pretty tough," said Warren Simpson, a money manager at Stephens Capital Management Inc. in Little Rock, Ark. "The effects of Asia are everywhere. That's the main culprit."
U.S. bonds were little changed after a government report showed the economy grew at a faster-than-expected pace in the second quarter, while inflation was subdued. The 30-year Treasury bond was unchanged, leaving its yield steady at 5.72 percent. The dollar rose to 144.65 yen in late New York trading from 143.82 yesterday.
The Commerce Department's report on gross domestic product showed the economy slowed in the second quarter, mostly due to the Asia crisis and the General Motors Corp. strike.
The slowdown wasless than expected in the second quarter, and consumer spending remained robust. Still, that wasn't enough reason to bid stocks higher, traders said.
"We know people are fully employed, the economy is humming and inflation is low," said Mace Blicksilver, managing director of U.S. equity trading at Credit Lyonnais Securities Inc. "The facts we don't know are earnings -- how badly are they going to get squeezed" by Asia's economic slowdown in coming quarters.
The Dow industrials are up 12 percent for the year and the Nasdaq composite index is up 19 percent, and many investors say gains that big aren't justified by the outlook for profit growth.
With 84 percent of the S&P 500 companies having reported second-quarter earnings, operating profits are on target to rise 2.9 percent from last year's quarter, according to First Call Corp. For the year, analysts now expect the companies in the S&P 500 to post operating earnings growth of 7.1 percent, down from the double-digit gains of recent years.
For the week, the Dow industrials fell 0.6 percent, the S&P 500 lost 1.8 percent and the Nasdaq Composite Index fell 3.0 percent. All three lost about 1 percent in July, after a rush to records petered out in the middle of the month.
Simpson, whose firm manages $750 million, recently bought some retail stocks, which he declined to name. The firm's largest holding is WorldCom Inc.The Dow Jones Utilities Average fell 6.20, or 2.2 percent, to 278.65, the largest decline for the average since Oct. 27.
NYSE volume totaled 641 million shares, about average for the past three months.
The losses worsened in the afternoon as waves of computer-guided sell programs hit the market. Short-term traders often sell some of their stockholdings late on Fridays to avoid being caught by bad news over the weekend, analysts say.
The government's report of stronger-than-expected growth in the first quarter failed to boost stocks. The U.S. economy grew at a 1.4 percent annual pace in the second quarter, the Commerce Department said. That's down from the first quarter's revised 5.5 percent rate, which was driven partly by a record buildup in business inventories. Economists surveyed by Bloomberg News forecast a 0.2 percent increase.
Consumer spending -- which makes up about two-thirds of the economy -- kept pace, with personal spending rising at a 5.8 percent rate, almost equaling the 6.1 percent rise in the first quarter. Some analysts had been concerned that Asia's recession would hit the U.S. hard enough to shrink the economy in the second quarter.
The GDP report is "good for the equity market, because it tells you that growth in the second quarter was stronger than expected," said Maureen Maguire, senior economist at NationsBanc Montgomery Securities Inc. in San Francisco. "The consumer's boosted by real wage gains, confidence is very high and interest rates are very low."
Still, the report failed to assuage concerns that profit growth overall is slowing, threatening to end the stock market's three-year string of 20 to 30 percent gains.
Besides concern about Asia's slowdown, investors also have to worry that the stronger-than-expected growth could prompt the Federal Reserve to raise interest rates down the road to cool the economy and keep inflation in check.
Right now, though, higher interest rates aren't much of a threat. The government's "GDP price deflator," a measure of inflation, grew less than expected in the second quarter, and bonds were little changed on the report.
"We are pretty optimistic about the Treasury market," said Jack Ablin, chief investment officer at Colonial Asset Management in Jacksonville, Florida, which manages $220 million. "It's the best of both worlds -- strong growth and low inflation."
For the month, benchmark 30-year yields climbed 9 basis points as some of the buying triggered by Asia's economic turmoil waned. Bonds handed investors a return of 6.3 percent so far this year, when price gains and coupon payments are included.
About $50 billion in Treasuries traded through most of the major bond brokers as of 3 p.m. U.S. Eastern time, according to GovPX, Inc., a bond pricing service. Volume was about 38 percent above average for a Friday in the past month, GovPX said.
A separate report from the Chicago branch of the National Association of Purchasing Management also suggested the economy is growing without quickening inflation. Its monthly index of regional manufacturing unexpectedly rose in July, while the prices paid index, a measure of inflation, fell.
"It's a reflection of the strong growth and low inflation scenario," said Len Carlson, who helps manage about $20 billion in bonds at Aeltus Investment Management in Hartford, Connecticut. He said he would consider buying if 30-year yields rise to 5.80 percent.
Investors said events overseas are having a bigger impact on the market that those in the U.S., and will likely bolster demand for Treasury securities in coming months.
"Between Asia and emerging markets, there are still enough problems to temper any bearish activity" in the Treasury market, said Mike Mullaney, who manages more than $1 billion at Boston Partners Asset Management.
Mullaney expects 30-year yields to move between 5.55 percent and 5.75 percent in the weeks ahead, and said he'd look to buy if yields climb a bit from here. "We'd be more aggressive at the 5.75 percent level."