Stock prices fell broadly Wednesday, as the latest version of tech wreck continued on Wall Street. Ahead of Friday’s critical report on job growth and unemployment in May, bonds slipped. The dollar held steady.
The Dow Jones industrial average dropped 42.49 points, to 7269.66, on moderate New York Stock Exchange volume of 467 million shares. Broader market indexes also slipped, although losing stocks held only a 13-to-11 lead over winners among NYSE issues.
The Nasdaq composite index lost 5.24, to 1379.67. The technology stock index at the Chicago Board Options Exchange dropped more than 1 percent, to 208.51, wiping out its late-May rally.
Gregory Nie, technical market analyst at Everen Securities in Chicago, said the technical picture for the stock market remains positive amid the current choppy trading environment.
“The charts are in decent shape,” he said. For one thing, the number of advancing stocks generally has slightly exceeded decliners in the last two weeks. “But the conviction is not there,” he said, perhaps because prices are at a temporary peak.
Nie said the percentage of stocks trading at prices above their 10-week moving average stands at more than 80 percent, a five-year high and an indication that the market is “overbought,” as technical analysts say.
The slump in stock prices extended beyond the technology sector Wednesday after PepsiCo disappointed analysts during an outlook conference. Analysts attending the meeting said the company intended to meet its goal of 15 percent profit growth next year but might have to sell off assets to do it. Wall Street had hoped the company could achieve its profit target through increased sales of its products.
Generally, traders in stocks and bonds were reluctant to take major new positions ahead of Friday’s Labor Department report for May. Many economists believe the report will be the most important factor in the Federal Reserve’s decision on whether to raise short-term interest rates at its next policy meeting in four weeks.
The yield on the benchmark 30- year Treasury bond notched higher, ending a four-day streak of declines.
Earnings countdown: The usual countdown to the quarterly corporate earnings reporting cycle seems to be starting early. Profit warnings by Intel on Friday and Seagate Technology and Cabletron Systems this week sparked the slump in computer-technology stocks. PepsiCo’s comments to analysts extended the anxiety to the broad market.
Benjamin Zacks, executive vice president of Chicago-based Zacks Investment Research, said the worry actually began in mid-May with Hewlett-Packard’s fiscal second-quarter earnings announcement, which revealed poor growth in new orders.
After the bad news from Hewlett-Packard, Intel, Cabletron and Seagate, “I expect a lot more negative pre-announcements in the technology area,” Zacks said.
Sports apparel-maker Nike’s forecasts of a weak fiscal fourth quarter, issued in late May, plus PepsiCo’s remarks, have broadened the gloom, he added.
Nonetheless, the picture isn’t all that bad. Analysts tracked by Zacks are forecasting year-over-year earnings-per-share gains for companies in the Standard & Poor’s 500-stock index of 9.4 percent, respectable growth in what many economists believe to be the late stage of the business cycle.
Boston-based First Call, which also tracks analyst forecasts, said analysts at this point expect 10.3 percent growth in profits for the S&P 500 companies. But Charles Hill, First Call’s director of research, forecasts that the number will come in at about 11.8 percent, down from 15.4 percent in the first quarter.
As far as the headline-grabbing profit warnings are concerned, Hill says there are fewer than normal negative pre-announcements, although there aren’t enough companies forecasting second-quarter results yet to draw conclusions.
“Despite all the publicity, there’s nothing yet to say we’re in for a more negative pre-announcement period than usual,” he said. In the first quarter, for example, 62 percent of the pre-announcements were negative. So far this time, 55 percent of the pre-announcements are negative. Companies are more likely to telegraph their earnings results when the news is bad, Hill added.
As to the actual profit reports, Hill and Zacks note that first-quarter growth in earnings per share benefited from sluggish economic conditions in the first three months of 1996, creating an easier year-over-year comparison.
Second-quarter results may look like a slowdown, but the first two quarters of the year probably should be combined to smooth out the comparison, Hill said.
“This quarter was always expected to be lower,” Zacks agreed. “It’s up against a much stronger quarter a year ago.”
Local news: Shares of Woodward Governor, Rockford, a maker of mechanical controls for diesel engines, turbines and other power equipment, jumped $3.25, to $33.75, on news late Tuesday that General Electric will market worldwide the low-pollution system for gas turbines made in a joint venture with Catalytica, a California-based company. Analyst Robert Kruger of Van Kasper & Co. told Dow Jones the deal means the Catalytica/Woodward system “will become the standard for air-pollution reduction in natural-gas turbines.”
– Nicor, the Naperville gas utility and pipeline company, will repurchase up to $50 million of its shares. Since the end of 1989, the company has bought back $280 million, or 18 percent, of its stock.
