U.S. Stocks Decline As Investors Rethink Next Fed Move

NEW YORK (MarketWatch) -- U.S. stocks on Friday faltered as nerves frayed and investors reduced their expectations for next week's monetary policy-setting meeting by the Federal Reserve, which already weighed in with an emergency interest-rate cut earlier this week.

The market had been anticipating another 50 basis point reduction in the Fed's target rate at the two-day meeting that starts Tuesday.

"The consensus is now 25; or the 75 basis points could have been an early jump and they won't cut anything," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.

"We still have fears of what will happen next week," said Art Hogan, chief market strategist at Jefferies & Co. "This market is groping for a bottom."

After earlier climbing more than 100 points, the Dow Jones Industrial Average was more recently off 158.4 points at 12,220.2, with 23 of its components lower, led by drug manufacturer Merck & Co. Inc. , off 5.6%.

Merck, along with Schering-Plough Corp. , in a statement defended their clinical trials of a popular cholesterol-lowering drug Vytorin.

Schering-Plough shares also fell, recently down 9.4%.

The S&P 500 declined 20.05 points to 1,332.02, while the Nasdaq Composite fell 27.10 points to 2,333.82.

"There are still general concerns that the financial system hasn't quite resolved issues around the write-offs, we are seeing this on the auto and credit card sides," said Deutsche Bank's Fitzpatrick.

Goldman plays defense

The equities market had pared early gains amid lots of talk and one report involving terminations at Goldman Sachs Group Inc. . The investment firm countered by saying it was reviewing the bottom 5% of performers in its global workforce of about 30,000, and that it was still actively recruiting staff.

Early gains came after a trio of blue chips -- Honeywell International Inc., Microsoft Corp. and Caterpillar Inc. -- reported financial results that beat analysts' expectations, lifting market sentiment. But investors remained cautious about the overall economy.

"The market needs further confirmation the economy is not in a recession; next week's economic data could set the tone," said Peter Cardillo, chief market economist at Avalon Partners.

On the New York Mercantile Exchange, gold futures soared to a new record high at $924.30 in electronic trading, with the benchmark contract ending up $4.90 at $910.7. .

In energy trading, crude-oil futures rose $1.39 to $90.80 a barrel, on hopes that the fiscal stimulus package announced Thursday will lift the U.S. economy. .

Volume on the New York Stock Exchange came to 1.3 billion shares, and declining stocks moved past those advancing nearly 9 to 7. On the Nasdaq, about 2 billion shares changed hands, with decliners topping advancers, also 9 to 7.

Earnings highlights

Shares of Honeywell shares were recently up 3.7%. Late Thursday, the blue-chip conglomerate reported an 18% profit increase for the fourth quarter.

Shares of Microsoft rose nearly 0.1% after the software giant posted an 81% surge in quarterly profit.

And Caterpillar gained 0.8% after it said fourth-quarter earnings grew about 14%.

Juniper Networks impressed with its quarterly results, sending shares up 2.6%.

Shares of E-Trade Financial rose 7.5%, rallying after it outlined a plan to cut costs by $360 million this year after reporting a $1.7 billion quarterly loss.

And Harley-Davidson Inc reported a 26% drop in fourth-quarter net income, due in part to a weak U.S. economy slowing sales. Shares of the motorcycle manufacturer were off 4.9%.

On Thursday, U.S. stocks claimed higher ground for a second straight day after the White House and the House leadership unveiled a tentative economic-stimulus package, lifting an equities market battered by worries about a recession.

By Kate Gibson