US stocks fell sharply on Wednesday after a top Federal Reserve official said the central bank must be alert to potential inflation and after crude oil prices dropped more than $1 barrel, pushing energy shares lower.
Dow component Exxon Mobil Corp fell 2.6 percent to $58.95 on the New York Stock Exchange, and the American Stock Exchange oil index fell 4.04 percent in its biggest one-day drop in nearly three years, after US crude for November delivery dropped $1.11 to settle at $62.79 per barrel.
The Dow Jones industrial average was down 123.75 points, or 1.19 percent, to end at 10,317.36. The Standard & Poor's 500 Index was down 18.08 points, or 1.49 percent, to finish at 1,196.39. The technology-laced Nasdaq Composite Index was down 36.34 points, or 1.70 percent, to close at 2,103.02.
The drop in the Dow was the biggest percentage decline since June 23. For both the S&P 500 and the Nasdaq, the day's percentage drop was the biggest decline since April 15. The slide in the S&P 500 pushed the broad market index back into negative territory for the year.
Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said in a speech to business leaders in Casper, Wyoming, that there does not seem to be much risk of a huge surge in inflation but policy-makers must be alert to potential prices pressures. He added, however, that even before Hurricane Katrina, the US economy was starting to see significant impacts from energy costs.
While Hoenig's comments weren't particularly negative for the market, investors are anticipating further interest-rate increases from the Fed, which is adding to negative sentiment, Michael Sheldon, chief market strategist for New York brokerage Spencer Clarke, said.
"More firms seem to be of the camp that the Fed has more work ahead of it," he said. "Investors need to be worried about a rise in core inflation, and specifically that energy prices will create higher core inflation in the months ahead."
Sheldon said higher natural gas prices also will be a big concern for corporations.
Hoenig said Wednesday afternoon that with winter approaching, the impact of higher natural gas prices will be "an important period for us to get through" because it may have a psychological impact on consumer confidence and their willingness to keep spending.
Tuesday's market similarly was roiled by comments from Dallas Federal Reserve Bank President Richard Fisher that the United States was facing inflation pressures.
Profit and revenue warnings also weighed on stock prices. Shares of network infrastructure company ADC Telecommunications Inc and software maker Mercury Interactive Corp dropped after the companies said they expected to miss Wall Street's expectations.
ADC forecast quarterly earnings from continuing operations would fall below analysts' expectations. Its shares fell 13.5 percent, or $3.06, to $19.61 on the Nasdaq. Trading was heavy on the New York Stock Exchange, where decliners beat advancers by about 9 to 2. About 1.9 billion shares were traded on the Big Board, above the 1.5 billion daily average for last year.
On Nasdaq, decliners outnumbered advancers by a ratio of about 4 to 1, with about 2 billion shares changing hands, above the 1.8 billion daily average last year.
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