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updated: 1/30/2013 4:23 PM

Stocks drop as economy put brakes on stock rally

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  • U.S. stocks fell, dragging benchmark indexes from five-year highs, as the Federal Reserve said it will maintain its program to buy securities after the economy unexpectedly shrank in the fourth quarter.

      U.S. stocks fell, dragging benchmark indexes from five-year highs, as the Federal Reserve said it will maintain its program to buy securities after the economy unexpectedly shrank in the fourth quarter.
    ASSOCIATED PRESS

 
Associated Press

NEW YORK -- A reminder that the U.S. economy still remains a long way from being fully healed after the Great Recession put the brakes on a January rally that has pushed stocks close to record levels. The Standard & Poor's 500 logged its biggest drop of the year.

Stocks started the day lower after a report showed that the U.S. economy unexpectedly contracted in the fourth quarter. That decline extended after the Federal Reserve said that it would continue its bond-buying program to boost growth.

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The Dow Jones industrial average fell 44 points, or 0.3 percent, to close at 13,910.42, logging only its second decline in nine days. The Standard & Poor's 500 fell 6 points, or 0.4 percent, to 1,501.96, its biggest decline since Dec. 28. The Nasdaq composite fell 11 points to 3,142.31.

The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles, the Commerce Department said Wednesday.

The Fed acknowledged that the economy is still struggling to regain momentum, in a statement it released Wednesday afternoon following its two-day meeting, saying that growth had "paused in recent months." The central bank took no new action and said it would keep buying $85 billion of bonds a month as part of its plan to keep borrowing costs low to spur growth.

"The Fed didn't really say anything out of the ordinary, so you got the reaction you should've had in the morning," said Joe Saluzzi a co-founder at brokerage firm Themis Trading. "When you've spent this much money trying to prop up an economy and you still come up with a negative print, that's bad news."

Still, stocks remain on track for a great January.

The Dow Jones average has surged 6.2 percent since the start of the year, climbing close to 14,000 and within touching distance of its record level. The S&P 500 has gained 5.3 percent this month, close to its highest level in more than five years. Investors bought stocks after lawmakers reached a deal to avoid the "fiscal cliff" and on optimism the U.S. housing market is recovering and the jobs market is slowly healing.

U.S. gross domestic product, the volume of all goods and services produced, contracted at an annual rate of 0.1 percent in the fourth quarter. That's a sharp slowdown from the 3.1 percent growth rate in the July-September quarter.

"To ignore this is folly," said Doug Cote, chief market strategist at ING Investment Management. "Certainly, this market could continue to move forward, but ignoring the fundamentals is not something I'd counsel my clients to do."

Positive company earnings reports helped offset the disappointing news about the economy and stem a bigger decline.

Amazon jumped $12.41, or 4.8 percent, to $272.76 after the world's biggest online retailer showed improving profit margins when it posted fourth-quarter earnings late Tuesday. Boeing, currently scrambling to fix battery problems that have grounded its 787 Dreamliner planes, gained 94 cents, or 1.3 percent, to $74.59 after it reported earnings that beat analysts' expectations. Rising profits from commercial jets offset a smaller profit from defense work.

A private survey showed Wednesday that U.S. businesses increased hiring in January compared with a revised December reading. Payroll processor ADP said that employers added 192,000 jobs in January.

Traders and investors will now turn their focus back on to company earnings and Friday's nonfarm employment report.

The yield on the 10-year Treasury note, which moves inversely to its price, fell 1 basis point to 1.99 percent.

Among other stocks making big moves Wednesday:

• Chesapeake Energy rose $1.14, or 6 percent, to $20.11 after the company said late Tuesday that its embattled CEO Aubrey McClendon will leave the company this spring.

• Avery Dennison, a packing materials company, rose $2.30, or 6.4 percent, to $38.44 after it posted fourth-quarter earnings that beat analysts' expectations and said it was selling two of its business units to CCL industries for $500 million. The company will use the proceeds of the sale to buy back stock and make additional pension contributions.

• Copano Energy, a natural energy company, rose $4.90, or 14.8 percent, to $38.03 after the company said that it had agreed to be acquired by Kinder Morgan Energy Partners for about $3.2 billion in stock.

• MeadWestvaco, a packaging company, fell $1.30, or 3.9 percent, to $31.63 after the company reported earnings that fell short of analysts' expectations.

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