News Article
BusinessWeek.com
October 27, 2006
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Stocks Fall after Soft GDP Report

Third-quarter economic growth slowed to a weaker-than-expected 1.6% pace. Also in focus: earnings reports from Microsoft and Chevron

Stocks finished lower Friday, a day after the Dow marked its fourth consecutive closing high. With earnings season winding down, investors were weighing an unexpectedly weak report on third-quarter economic growth. Traders were squaring their positions ahead of the weekend, but a key inflation indicator Monday could help stocks rebound, says Standard & Poor's Equity Research.

On Friday, the Dow Jones industrial average fell 73.4 points, or 0.6%, to 12,090.26, pulling back from its best-ever closing level but finishing up 0.8% for the week. The broader Standard & Poor's 500 index dropped 11.74 points, or 0.85%, to 1,377.34, for a weekly gain of 0.7%. The tech-heavy Nasdaq composite slid 28.48 points, or 1.2%, to 2,350.62, up 0.4% on the week, as a Goldman Sachs note saying demand for motherboards is "falling off a cliff" weighed on the tech sector.

NYSE breadth was negative, with 22 issues declining for every 11 advancing. Nasdaq breadth was 20-10 negative.

Economic numbers were in focus at the outset Friday. Third-quarter real gross domestic product (GDP) growth slowed to a 1.6% rate in the Commerce Department's advance report, from 2.6% the previous quarter and 5.6% in the first quarter. The report was weaker than expected, says Action Economics.

The cooling housing market helped drag down overall GDP growth, analysts say. "Coupled with slight disappointments on consumer spending and business investment, this is not positive for near-term growth prospects," says Goldman Sachs.

Still, others noted strength in the underlying details of the report, including consumer spending. "The market kind of overreacted to it at first," says chief investment strategist at PNC Wealth Management. "A pretty weak headline number there raised some concerns, but within the body of the report we find reasons to be a little bit more optimistic."

The Federal Reserve's next move is still more likely to be an interest-rate hike than a cut, some analysts say. "Any expectations of Fed easing at this point would be very premature, in our judgment, as demand growth was fairly solid outside of housing and, partly fueled by real income gains from lower energy prices, we see that demand growth continuing into the fourth quarter," says John Ryding, chief U.S. economist at Bear Stearns.

Also on the economic docket, consumer sentiment rose to 93.6 in the University of Michigan's final October reading, up from the 92.3 preliminary figure and 85.4 final September reading.

The calendar next week holds October employment data, third-quarter figures on employment costs and productivity, and October national business activity surveys.

In corporate news, Microsoft (MSFT) reported a stronger-than-expected 11% earnings increase for the software maker's fiscal first quarter, but its second-quarter guidance was lower than analysts projected.

Oil producer Chevron (CVX) followed Exxon Mobil's (XOM) blowout earnings report with a $5 billion third-quarter profit of its own, exceeding Wall Street estimates.

Meanwhile, server and software maker Sun Microsystems (SUNW) posted a narrow quarterly loss than expected on 17% higher revenue.

Companies set to report quarterly results next week include Eastman Kodak (EK), Procter & Gamble (PG), Qwest (Q), and Verizon (VZ).

On the M&A front, Mexican cement maker Cemex (CX) said it would offer $12.8 billion, including $1.1 billion in debt assumption, for Australian building materials group Rinker (RIN).

In the energy markets, December West Texas Intermediate crude futures rose 39 cents to $60.75 a barrel in choppy action.

European markets finished lower. In London, the FTSE-100 index fell 23.9 points, or 0.39%, to 6,160.9. Germany's DAX index dropped 21.65 points, or 0.34%, to 6,262.54. In Paris, the CAC 40 index skidded 37.76 points, or 0.69%, to 5,396.03.

Asian markets ended lower. In Japan, the Nikkei 225 index slid 142.53 points, or 0.85%, to 16,669.07. In Hong Kong, the Hang Seng index lost 56.19 points, or 0.31%, to 18,297.55. Korea's Kospi index dipped 4.56 points, or 0.33%, to 1,369.09.

Treasury Market

Treasury yields dipped following the weak GDP reading. The 10-year note rose in price to 101-17/32 for a yield of 4.67%, while the 30-year bond advanced to 95-13/32 for a yield of 4.79%.