U.S. stocks fell for a third straight day Wednesday as an optimistic sales forecast from Intel was overshadowed by concern that the Federal Reserve Board won't cut interest rates when it meets next week. Drug makers such as Merck and bank shares led the decline.
"Stocks entered today's session fully valued on expectations for" an interest rate cut, said Charles Crane, chief market strategist at Key Asset Management, which oversees $62 billion. The five-week rally that lifted the Dow Jones industrial average 14% leaves "no compelling reason to buy and more reason to sell" unless rates fall, he said.
The Dow industrials fell 40.16 points, or 0.5%, to 8,823.82. The Standard & Poor's 500 index dropped 7.29 points, or 0.7%, to 1,120.97. The Nasdaq composite index, loaded with computer-related stocks such as Intel and Microsoft, slipped 3.51 points, or 0.2%, to 1,862.11. Three stocks fell for every two that rose on the New York Stock Exchange.
The NYSE composite index fell 4.06 points to 553.36, and the American Stock Exchange composite index fell 1.28 points to 663.81.
The Russell 2,000 index of smaller companies fell 3.39 points to 393.47.
The dollar fell against the yen on speculation that a Japanese income tax cut and spending plan to be unveiled today will help the economy emerge from its worst recession in 50 years. The dollar fell to 121.72 yen from 122.52 on Tuesday. Against the German mark, the dollar slipped to 1.6775 marks from 1.6817.
The package by Japan's ruling Liberal Democratic Party is estimated to contain about $165 billion of economy-boosting measures. Also, Prime Minister Keizo Obuchi may discuss cutting the nation's 5% sales tax next week in talks with opposition party members, legislators in Tokyo said.
The sales tax cut "would be overwhelmingly positive" for Japan and the yen, said Kathy Jones, a currency analyst at Prudential Securities.
Yet, many traders and economists are skeptical that the plan will prove effective given that past packages have failed to spark a recovery. What Japan really needs to do, they say, is fix the debt-burdened banking system and loosen regulations.
U.S. bond markets were closed in observance of the Veterans Day holiday. The Federal Reserve System, used for securities clearing and delivery, was closed.
Central bank policymakers, who cut the target for overnight lending between banks on Sept. 29 and Oct. 15, meet again Tuesday. Lower interest rates generally help boost corporate earnings because they make it less expensive for companies to borrow money and grow.
"Our guess is that the Fed won't ease at this coming meeting because the improvement in market psychology has been so pronounced that [Fed Chairman Alan] Greenspan doesn't feel the same sense of urgency," said Bruce D. Simon, chief investment officer at Glenmede Trust in Philadelphia, also noting that the U.S. economy is showing some resilience.
Among Wednesday's highlights:
* Among the Dow industrials, Merck fell $2.81 to $144 and Caterpillar fell $2.63 to $45.44, offsetting gains from technology components IBM, up $1.13 to $157.13, and Hewlett-Packard, up $1.88 to $65.63.
Merck, which had gained 9% in the last two weeks, accounted for a quarter of the Dow average's decline. Merck had rallied in the previous four sessions on optimism that new arthritis drugs will bolster profit at the world's largest drug maker.
* Financial services giant Citigroup fell $1.13 to $42.38. U.S. Bancorp fell $1.44 to $36.31. Banks benefit in particular from lower rates because they boost demand for loans and credit.
* Chip maker Intel gained $6.13 to $103.69. The company said fourth-quarter revenue will rise as much as 10% from the previous quarter because of stronger-than-expected demand from personal computer makers.
That helped lift shares of Dell, up $1.63 to $71.94, and Compaq Computer, up $1.63 to $34.50.
Overseas, Japan's Nikkei stock average fell 0.6%, Germany's DAX index rose 2.3% and Britain's FTSE-100 rose 1.2%.
Market Roundup, C7