Worse-than-expected economic data hurts stocks
NEW YORK -- The problem with rising expectations is that it gets tougher to beat them.
Investors exited stocks Wednesday after U.S. data on the services industry and factory orders came in below forecasts. Factory orders actually rose in April, but the report was a disappointment because investors anticipated a larger increase.
Market indicators fell at least 1.2 percent, including the Dow Jones industrial average, which lost more than 115 points.
Since the Dow's 12-year low in early March, optimism about the economy's stabilization has buoyed the index by more than 30 percent. Over those three months, topping investors' expectations meant clearing a relatively low bar.
Alan Gayle, senior investment strategist at RidgeWorth Capital Management, said he began increasing his stock holdings in March on signs that economic data was becoming "less bad."
But now, Gayle said, "'less bad' is not good enough."
Even Federal Reserve Chairman Ben Bernanke was no longer emphasizing signs of economic stabilization on Wednesday, as he was in recent months. Bernanke focused instead on the government's troubling debt load, saying that failing to ease the deficit could undermine efforts to revitalize the economy.
The Standard & Poor's 500 index and Nasdaq composite index pulled back from their highest levels so far this year, reached Tuesday. Both the S&P and Nasdaq are still higher for the year, but the Dow has yet to break into positive territory for 2009. It got within 35 points, or 0.4 percent, of that break-even point on Tuesday.
In late afternoon trading, the Dow dropped 115.49, or 1.3 percent, to 8,625.38. The Standard & Poor's 500 index fell 17.65, or 1.9 percent, to 927.09, and the Nasdaq composite index dropped 21.63, or 1.2 percent, to 1,815.17.
About 3 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 858 million shares, compared with 936 million shares at the same time a day earlier.
Shares fell across the board, with some of the biggest declines in energy, industrial and material stocks -- all areas that have benefited in recent days from gains in oil and commodity prices.
Oil prices pulled back sharply on Wednesday after a weeklong rally as the government reported a big jump in crude storage levels, signaling continued weak demand.
As oil prices shed $2.43 a barrel to $66.12, Valero Energy Corp. sank $4.06, or 18.1 percent, to $18.32, and Sunoco Inc. dropped $2.72, or 9 percent, to $27.58.
Investors in both stocks and energy were displeased with a Commerce Department report showing a smaller-than-expected rise in factory orders. Though it was the second gain in the past three months, orders rose just 0.7 percent in April when analysts had called for a 0.9 percent increase.
Also, a trade group reported that the services sector shrank in May at the slowest pace since October. The barometer was below economists' estimates and marked the eighth straight monthly decline.
The rally's staying power will face further tests this week as retailers report May sales results Thursday and as the Labor Department releases its monthly jobs report on Friday. The unemployment report is one of the most closely watched indicators of the economy's health.
Matt King, chief investment officer of Oakland, Calif.-based Bell Investment Advisors, sees the market's dips as an opportunity to increase exposure to stocks.
"We're trying to caution people that just because the market pulls back doesn't mean we're heading back to the bottom," he said.
Still, analysts are keeping a close eye on rising Treasury yields and a weakening dollar, two areas of concern that have cropped up recently. Investors fear those factors, largely an outcome of the government's massive stimulus efforts and the improved outlook on the economy, could also hinder a robust recovery.
Rising yields could lead to higher interest rates on mortgages and other types of consumer loans to which they are linked, while a falling dollar could trigger inflation and hamper the buying power of consumers.
On Wednesday, however, both Treasurys and the dollar rebounded.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, slipped to 3.54 percent from 3.62 percent. Last week, the 10-year yield surged to a six-month high of 3.75 percent.
The dollar gained ground against the euro and the British pound, while gold prices sank.
In other trading, the Russell 2000 index of smaller companies fell 6.85, or 1.3 percent, to 519.78.
Overseas, Japan's Nikkei stock average added 0.4 percent. In European trading, Britain's FTSE 100 fell 2.1 percent, Germany's DAX index was down 1.7 percent, and France's CAC-40 fell 2.0 percent.