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Wall Street falls after Bernanke comments add to housing, credit worries, and oil prices jump

NEW YORK — Wall Street sank for a second straight session Tuesday after Federal Reserve Chairman Ben Bernanke said the slumping housing market remains a "significant drag" on the economy.

Bernanke's speech Monday night in New York elevated concerns that the summer's credit tightness 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 spiked to another record above $88, 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. Also Tuesday, Treasury Secretary Henry Paulson echoed Bernanke's concerns, saying housing is a significant risk to the economy.

The uncertainty on Wall Street about the economic outlook "comes at a time when earnings results are not particularly exciting — in fact, are dismal," Johnson said.

A day after Citigroup Inc. reported a steep third-quarter profit decline and announced plans with other banks to set up a fund to bail out the credit markets, some more banks released disappointing results.

Wells Fargo & Co. shares fell nearly 4 percent after the bank said third-quarter earnings increased by less than analysts anticipated and that it boosted loan-loss reserves in preparation for more problems in consumer credit. KeyCorp shares declined nearly 6 percent after the Midwest regional bank posted a 33 percent drop in third-quarter profit. U.S. Bancorp also reported a dip in third-quarter earnings.

The Dow Jones industrial average fell 71.86, or 0.51 percent, to 13,912.94, after falling more than 100 points earlier in the session.

Broader indicators also declined. The Standard & Poor's 500 index slid 10.18, or 0.66 percent, to 1,538.53, and the Nasdaq composite index dipped 16.14, or 0.58 percent, to 2,763.91. The Russell 2000 Index of smaller companies fell 6.01, or 0.72 percent, to 823.35.

The technology-dominated Nasdaq could get a boost, though, on Wednesday: Intel Corp. and Yahoo Inc. posted better-than-expected third-quarter results after the bell Tuesday, and their stocks gained sharply in after-market trading.

Bond prices rose as investors pulled money out of stocks. The yield on the 10-year Treasury note, which moves inversely to the price, fell to 4.66 percent from 4.68 percent at Monday's close.

The dollar rose against most currencies. Gold also rose.

On Monday, the Dow and the S&P posted their biggest point drops in five weeks; just last week, the two indexes touched record highs.

"The relief rally that we've enjoyed since Aug. 16, the day before the Fed cut the discount rate, has been an impressive one. And it will probably still push stock prices higher the rest of the year," said Edward Yardeni, an economist who runs Yardeni Research in Great Neck, N.Y.

But, he added, "the first batch of earnings news for the third quarter gives some reason for concern, particularly for the banks, who are probably going to continue to have problems with their own portfolios."

Bernanke said Monday night the deepening housing slump will probably keep dragging on economic growth, but he again pledged to "act as needed" to help the financial markets recover from their freeze. He also said inflation remains in check — which could persuade policymakers to lower rates for the second month in a row at their Oct. 30-31 meeting.

But while core inflation — which excludes volatile food and energy prices — is mild, oil prices are pushing further into uncharted territory on speculation about supply disruptions.

Crude futures rose $1.48 to a record close of $87.61 a barrel on the New York Mercantile Exchange, after briefly surpassing $88.

Declining issues outnumbered advancers by about 8 to 3 on the New York Stock Exchange. Consolidated volume came to 3.13 billion shares, down from 3.03 billion Monday.

Yahoo reported earnings of 11 cents a share, well ahead of analysts' forecasts for 8 cents. After falling $1.17 to $26.69 during the regular session, the company's stock was up 8 percent at $29.01 in after-hours trading.

Intel, meanwhile, had earnings of 31 cents per share, a penny ahead of expectations. After falling 27 cents to $25.48 in regular trading, Intel's stock was quoted at $26.80, up 5 percent in after-hours trading.

Most financial and housing-related stocks fell, as did retailers.

A couple bright spots in the financial sector were State Street Corp., a trust bank that posted a profit rise of 29 percent on strong revenue from servicing fees and trading services, and Bear Stearns Cos. The investment arm of China's cabinet is planning a bid for a stake in the brokerage.

State Street rose $5.75, or 8.3 percent, to $74.68.

Bear Stearns rose $2.36, or 2 percent, to $123.05.

Overseas, Japan's Nikkei stock average fell 1.27 percent; Hong Kong's Hang Seng index fell 1.98 percent; Britain's FTSE 100 fell 0.45 percent; Germany's DAX index fell 0.09 percent; and France's CAC-40 fell 0.57 percent.