Stocks stumble on Bernanke's gloomy economic outlook
Bernanke's speech Monday night at the New York Economic Club elevated concerns that the summer credit crisis might persist into the winter — a sobering thought for investors, who are sifting through mixed third-quarter earnings and watching energy costs rise.
"First of all, the worry is we're getting more bad news on housing. No. 2 is higher oil prices. That's a pretty bad combination," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.
Crude oil prices briefly spiked to a record above $88 a barrel Tuesday, and a National Association of Home Builders' index that tracks developers' expectations of future home sales fell for the eighth consecutive month to the lowest point since January 1985.
Johnson added: "Of particular concern were the comments by Bernanke. That sort of injected a fairly high level of uncertainty into the economic and earnings outlook. That comes at a time when earnings results are not particularly exciting — in fact, are dismal."
The Dow Jones industrial average and the Standard & Poor's 500 index posted their biggest point drops in five weeks Monday, after Citigroup (C) reported a steep third-quarter profit decline and announced plans with a consortium of banks to set up a fund to help bail out the credit markets.
Then Tuesday, Wells Fargo (WFC) shares fell more than 3% after the bank said third-quarter earnings increased less than analysts anticipated and that it boosted loan loss reserves in anticipation of further problems in consumer credit. KeyCorp (KEY) shares declined more than 5% after the Midwest regional bank posted a 33% drop in third-quarter profit.
In mid-afternoon trading, the Dow was dwon 72.27, or 0.5%, to 13,912.53.
Broader indicators also fell. The S&P 500 index slid 9.44, or 0.6%, to 1539.27, and the Nasdaq composite index dipped 13.48, or 0.5%, to 2766.57.
Bond prices rose as investors pulled money out of stocks, and the yield on the 10-year Treasury note fell to 4.64% from 4.68% at Monday's close. Bond prices and yields move in opposite directions. The dollar rose against most currencies. Gold also rose.
On Tuesday, Treasury Secretary Henry Paulson echoed Bernanke's sentiments, saying the housing market is a signficant risk to the economy. Bernanke had said Monday the deepening housing slump will probably keep dragging on economic growth.
Still, Bernanke again pledged to "act as needed" to help financial markets that seized up this summer, and said inflation remains in check. Inflation could be a key factor for policymakers when deciding whether to cut interest rates for the second month in a row at their Oct. 30-31 meeting.
While core inflation — which excludes volatile food and energy prices — is mild, oil prices are pushing further into record territory on speculation about supply disruptions.
Crude futures rose $1.38 to $87.51 a barrel on the New York Mercantile Exchange, after briefly surpassing $88.
Declining issues outnumbered advancers by 2 to 1 on the New York Stock Exchange. Volume came to a fairly light 804.23 million shares.
Overseas, Japan's Nikkei stock average fell 1.3% and Hong Kong's Hang Seng index fell 2.0%. Britain's FTSE 100 fell 0.5%, Germany's DAX index fell 0.1%, and France's CAC-40 fell 0.6%.
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