US stocks slide after new home sales fall

Wednesday, October 28, 2009 - 09:53 PM

Signs of a weaker US housing market and a gloomier outlook on the economy gave investors more reasons to dump stocks today.

Major market indexes fell sharply today after the Commerce Department said new home sales dropped for the first time in five months. Sales slid 3.6% in September to 402,000. Analysts had expected an increase.

The Dow Jones industrial average lost 119 points, or 1.2%. The Nasdaq composite index fell 2.7%, while the Russell 2000 index of smaller companies tumbled 3.5%. Many of the stocks in both indexes are considered more risky and so they suffered some of the biggest losses.

The retreat came as Goldman Sachs Group reduced its expectation for the US economic output for the July-September period. Goldman Sachs predicts third-quarter gross domestic product rose at an annual rate of 2.7%, weaker than its earlier forecast of 3%.

The government’s report on third-quarter GDP is due tomorrow. Economists are looking for growth at an annual rate of 3.3% after a record four straight quarters of contraction.

The day’s slide signaled that investors were reassessing their hopes for a recovery in the economy. Demand for safe-havens like Treasurys rose, as did stocks of companies whose business is expected to fare better in a slump. Stocks of consumer staples companies like Procter & Gamble edged higher.

Analysts said the market’s slide in the past week isn’t surprising given the size of the advance in the last eight months and mixed economic readings.

“I’m not panicked at the moment,” said Manny Weintraub, president of Integre Advisors in New York. “I don’t think anyone expected a super robust recovery.”

Stocks struggled after a disappointing report on consumer confidence stirred worries about the strength of the coming holiday shopping period.

The Dow fell 119.48, or 1.2%, to 9,762.69.

The broader Standard & Poor’s 500 index fell for the fourth straight day, sliding 20.78, or 2%, to 1,042.63. The Nasdaq fell 56.48, or 2.7%, to 2,059.61.

The Russell 2000 index of smaller companies fell 20.63, or 3.5%, to 566.36.

At the New York Stock Exchange 2,777 stocks rose, while 322 rose. Volume came to 1.7 billion shares compared with 1.4 billion on Tuesday.

Overseas markets also tumbled.

Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania, said investors are looking at the latest data and worrying that the market has risen too much in anticipation of a recovery. The S&P 500 index is up 54.1% from a 12-year low in March, though it is down 5% since finishing at its highest level in more than a year at the start of last week.

The biggest slide since the market began rebounding eight months ago was a 7% slide from mid-June to mid-July.

“You’re starting to see some trepidation about how we move forward,” he said. Mr Schultz said the market is likely to stall without improvements in how much revenue companies bring in and better readings on unemployment.

With about half the companies in the S&P 500 index having reported third-quarter results, revenue is down 7.5% from a year earlier. The unemployment rate stands at 9.8% and is expected to top 10%.

A strengthening dollar and falling commodities prices have weighed on stocks. The ICE Futures US dollar index rose for a fifth straight day today, its longest gains since the start of July.

Crude oil fell $2.09 to settle at $77.46 per barrel on the New York Mercantile Exchange. Gold fell.

The drop in oil weighed on shares of energy companies. Oilfield services company Schlumberger fell 2.66 dollars, or 4.1%, to 62.27 dollars.

Home builders fell after the sales data. Hovnanian Enterprises slid 41 cents, or 9.5%, to 3.89 dollars. Toll Brothers fell 99 cents, or 5.5%, to 16.95 dollars.

The drop in new home sales follows a report from the National Association of Realtors last week that sales of existing home posted the biggest increase in 26 years in September as buyers tried to get ahead of a tax credit set to expire.

Some corporate news also touched off worries. Goodyear Tire & Rubber tumbled after it predicted operating income will fall in North America in the fourth quarter. The company said its third-quarter profit more than doubled as it cut costs and added products. The stock fell 3.28 dollars, or 19.6%, to $13.46.

In another sign of lingering troubles in the financial industry, GMAC Financial Services is in talks with the Treasury Department for a third bailout. The auto and mortgage lender has been among the financial firms hardest hit by rising loan defaults and troubled credit markets. The government already holds a 35% stake in GMAC after giving it $12.5bn (€8.5bn) in bailout money.