Closing Market Report

Star-Bulletin news services

Thursday, June 26, 2003

Fed’s interest rate cut
prompts market fall

NEW YORK >> The Federal Reserve's decision to cut interest rates by a quarter-percentage point disappointed Wall Street yesterday, sending the Dow Jones industrials down nearly 100 points.

Analysts said investors were largely expecting a quarter-point reduction, but many were hoping for a half-point cut.

"Traditionally, what you see on Fed decision day is a rally until up to just before the announcement, then we pull back a little bit," said Jeff Swensen, senior trader at John Hancock Funds.

"It's really symbolic," added Swensen, referring to the quarter-point cut. "There are other stimuli in the market that are going to help increase economic activity in the second half."

The Dow Jones industrial average closed down 98.32, or 1.1 percent, at 9,011.53, having gained 36.90 on Tuesday. Earlier in the day, the blue chips rose as much as 51 points.

The broader market also finished lower. The Nasdaq composite index slipped 2.95, or 0.2 percent, to 1,602.66. The Standard & Poor's 500 index fell 8.13, or 0.8 percent, to 975.32.

Advancing issues narrowly outnumbered decliners on the New York Stock Exchange. Volume was moderate at 1.43 billion shares, compared with 1.40 billion traded Tuesday.

The Russell 2000 index, a barometer of smaller company stocks, rose 2.32, or 0.5 percent, to 443.21. The NYSE composite index fell 27.84 to 5,523.35. The American Stock Exchange composite index gained 2.02 to 961.11.

The Fed voted 11-to-1 to cut the federal funds rate to 1 percent, the lowest level since 1958, noting that the economy had not yet shown sustainable growth. The dissenter, Fed member Robert Parry, supported a half-point cut.

"They pursued a sound compromise," said Joseph Keating, chief investment officer at AmSouth Asset Management. While working to prevent deflation, "the Fed recognized that many fundamentals for stronger growth were already in place."

Ed Peters, chief investment officer at PanAgora Asset Management Inc., said a market selloff after the decision wasn't surprising.

"When corporate earnings come in at the low end of expectations, markets are usually disappointed," Peters said. "The same will hold for the rate cut. Any positive impact is already priced in."

A pair of government reports, meanwhile, offered a mixed assessment of the economy.

The Commerce Department reported yesterday that new home sales jumped by 12.5 percent in May from the previous month. The seasonally adjusted annual rate of 1.16 million was the best month ever; the figure also beat analysts' expectations.

But in a separate report, the department said durable goods orders fell by 0.3 percent in May from April. The reading was weaker than the 1 percent gain economists were forecasting.

Stocks have rallied in the past three months on expectations of an improving economy and another rate cut.

But now investors want to see stronger proof the recovery is firmly on track, analysts say.

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