U.S. Stocks Close Lower After Rate-cut Rally Falls Apart
NEW YORK (MarketWatch) -- U.S. stocks crumbled into the close on Wednesday, after earlier rallying in reaction to the Federal Reserve's much-anticipated half-point rate cut, with speculation that bond insurers Ambac Financial and MBIA Inc. faced downgrades helping to fuel the late-session losses.
"I think it's important to recall that when the market gets what it expects it doesn't tend to celebrate, at least not in the long run since the market is a forward pricing mechanism," said Art Hogan, chief market strategist at Jefferies & Co.
Down about 30 points ahead of the Fed decision, the Dow Jones Industrial Average rallied nearly 200 points before retrenching as the closing bell neared to finish 37.5 points lower to 12,442.8.
"Uafter being unable to hang on to its post Fed rally. Fear that U.S. Ambac and MBIA will be downgraded by ratings agencies was a catalyst," said Action Economics.
Ambac and MBIA will lose more money than they are currently predicting from guarantees sold on complex mortgage-related securities, according to one longtime critic of the bond insurance industry. .
Of the Dow's 30 components, 17 closed with losses.
Another blue chip, Boeing Co. , rose 2.4% in the wake of its fourth-quarter earnings climb of 4%.
Merck & Co. was down the most, 5%, after the pharmaceutical company reported fourth-quarter losses of $1.63 billion, pegged in part to its Vioxx lawsuit settlement and restructuring charges.
The S&P 500 dropped 6.49 points, or 0.5%, to 1,355.81, while the technology-laden Nasdaq Composite fell 9.06 points, or 0.4%, to 2,349.00.
The recent spree of Fed action, beginning with the Fed's emergency 75 basis-point cut eight days ago, has helped the equities market recover its footing, with the Dow gaining more than 500 points, or 4.1%, since the three-day weekend that preceded Tuesday's unexpected Fed cut.
"If you look at the magnitude of the easing that has happened in the last eight days -- you'd have to go back to 1990 to see as an aggressive move -- it shows just how concerned the Fed is about the pace of the U.S. economy," said Hogan.
Crude-oil futures climbed for a fifth day, with the contract for March delivery up 69 cents to close at $92.33. .
Elsewhere on the New York Mercantile Exchange, gold for April delivery fell $4.5 to end at $926.3 an ounce. .
Volume hit 1.8 billion shares on the New York Stock Exchange, and declining stocks overtook those advancing 9 to 7. On the Nasdaq, nearly 2.6 billion shares were exchanged, and advancers 3 to 2.
Fed covered?
Early economic indicators mostly bolstered the case for the Fed to cut half a point, with the government reporting U.S. economic growth slowed sharply in the fourth quarter. .
"For the Fed, the forward-looking aspects of today's report are mixed and do not provide full cover for a 50-basis-point cut, although it is a very close call," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.
Conversely, the ADP employment report found the private sector added 130,000 jobs this month, nearly twice the 70,000 forecast by economists. .
Richard Hoey, analyst at Dreyfus Corp., had forecast a divided Fed would trim the benchmark rate another half point. .
Shares of Yahoo were down 8.7% on the heels of its quarterly results and downgrades by several brokerages. .
Other fourth-quarter earnings reports included a 6.3% profit decline at Kraft Foods Inc., with the world's second-largest foods producer attributing the drop to higher costs. .
Shares of E-Trade Financial Corp. rallied as several insiders said they had recently bought shares of the financial-services company. .
In Europe, two large banks disclosed fresh troubles stemming from the U.S. housing slump: Swiss giant UBS extended its latest write-down to $14 billion and France's BNP Paribas said its quarterly profit will slie more than 40%. .
European stocks weakened in the face of the new banking write-downs. .
In Asia, several markets surrendered gains to end in the red. .
By Kate Gibson