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Stocks open lower after jobs, income data

October 02, 2009|Walter Hamilton and Tom Petruno

NEW YORK AND LOS ANGELES — For the stock market, the fourth quarter got off to a rough start.

Major stock indexes suffered their worst declines in about three months Thursday as some previously ebullient investors grew concerned that the much-anticipated economic rebound would be a rocky one.

Disappointing reports on manufacturing and jobless benefit claims triggered the worries. And carmakers reported that their sales fell sharply in September after the government's "cash for clunkers" program expired.

The Dow Jones industrial average sank more than 200 points.

In a mini-replay of the "flight to quality" at the worst of the financial crisis, Treasury bond yields fell sharply as investors seeking a haven poured money into government securities.

After the stock market's huge advance since the spring -- the Dow bounded 50% from March 9 to Sept. 22 -- share prices are considered especially vulnerable to bad news.

"The equity markets have priced in a fairly healthy economic recovery, so the slightest bit of disappointment economically is going to take a little steam out," said Richard Weiss, chief investment officer at City National Bank in Los Angeles.

In much of the spring and summer, economic data generally came in better than expected. But recent reports have been mixed.

Among figures released Thursday, first-time unemployment claims rose more than predicted last week and a manufacturing index slipped unexpectedly in September but remained high enough to indicate expansion.

On a positive note, consumer spending rose in August at the fastest rate since 2001.

Goldman Sachs economists fed bearish sentiment Thursday by revising their estimate of the decline in the number of U.S. jobs last month. September's employment numbers are to be released today.

In a note to clients, Goldman said it expected the report to show that payrolls shrank by 250,000 jobs, more than the 200,000 the firm previously estimated and also worse than August's 216,000-job contraction.

Economists surveyed by Bloomberg News, however, expect on average a decline of only 175,000 jobs. That would be the smallest reduction in more than a year.

The mixed economic data could foreshadow a halting recovery that weighs on stock prices, some analysts say.

"The economy is rolling over because the artificial stimulants are exhausted," said Bill King, chief market strategist at M. Ramsey King Securities. "There's no job growth. There's no income growth."

The Dow Jones industrial average, which nearly topped 10,000 points less than two weeks ago, sank 203 points, or 2.1%, to 9,509.28.

The Standard & Poor's 500 index fell 27.23 points, or 2.6%, to 1,029.85. The Nasdaq composite index skidded 64.94 points, or 3.1%, to 2,057.48.

In the bond market, the 30-year Treasury yield fell below 4% for the first time since April, sinking to 3.96% from 4.04% on Wednesday. The yield on the 10-year T-note plummeted to 3.19% -- the lowest since May -- from 3.3% on Wednesday. In June, the 10-year note yielded as much as 3.95%.

The latest bond rally is making many individual investors look like they were ahead of the curve: The public has been voracious for bond mutual funds for the last few months, even when many Wall Street bulls insisted that stocks were the smarter investment in a recovering economy.

The drop in bond yields has helped drive down mortgage rates. Freddie Mac said Thursday that the average rate on a 30-year fixed-rate mortgage fell to 4.94% this week from almost 6.5% a year ago and a recent high of 5.59% in June.

For the bond market -- or at least the market for high-quality bonds such as Treasuries -- the explosion in demand suggests an epiphany for many people who didn't believe that long-term interest rates could go much lower.

Now, more investors are sensing that "the feel-good bounce in the economy created by the [government's] fiscal stimulus is not a permanent factor" said Tom Tucci, head of Treasury trading at RBC Capital Markets in New York.

The biggest factor driving cash into longer-term bonds is the feeling that inflation, which would drive down their value, is not a threat, Tucci said.

In fact, he said, sentiment is shifting toward the idea that the U.S. could face outright deflation, which could be a boon for bond portfolios.


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