U.S. Stocks Drop, Sending Dow Average to Worst Start Since 1983

By Elizabeth Stanton


Jan. 2 (Bloomberg) -- U.S. stocks tumbled, led by banks and computer companies, after the biggest decline in manufacturing in five years sent the Dow Jones Industrial Average to its worst start since 1983.

Intel Corp., the largest semiconductor maker, fell the most in almost a year after Bank of America Corp. lowered its rating and investors speculated companies will spend less on technology. Caterpillar Inc., the largest maker of earthmoving equipment, and International Business Machines Corp., the biggest computer services company, led the Dow Jones Industrial Average to a 1.7 percent plunge.

The Standard & Poor's 500 Index lost 21.20, or 1.4 percent, to 1,447.16, the most to start a year since it fell 2.8 percent on Jan. 2, 2001. The Dow average slipped 220.86 points to 13,043.96. The Nasdaq Composite Index decreased 42.65, or 1.6 percent, to 2,609.63. More than three stocks fell for every one that rose on the New York Stock Exchange.

The decline in the Institute for Supply Management's manufacturing index ``increases the odds we're going to go into a recession, and recessions are associated with bear markets,'' Brian Gendreau, who helps manage $12 billion at ING Investment Management in New York.

The ISM index dropped to 47.7, the lowest since April 2003 and the first reading below 50 since last January. The report, combined with a rise in the price of oil to a record $100 a barrel, spurred concern that a slowdown in spending will halt the five-year economic expansion.

Treasuries Rally

Two-year Treasuries rose the most in more than three weeks after the ISM report, while the dollar fell against the euro and yen, as traders increased bets the Federal Reserve will lower the benchmark interest rate half a percentage point at its next meeting.

Concern that credit-market losses will curb bank lending and spur a recession sent the S&P 500 down 3.8 percent in the fourth quarter, cutting the gauge's 2007 gain to 3.5 percent. Financial shares in the S&P 500 fell 2.5 percent, extending a 21 percent slide in 2007 that was their biggest in 17 years.

Intel lost $1.31 to $25.35, leading semiconductor makers in the S&P 500 to a 3.7 percent retreat, the biggest since July 2006 and the most among 24 industry groups in the index. Profit growth that exceeds analysts' estimates ``will be hard to come by,'' Bank of America analyst Sumit Dhanda wrote in a note to clients today.

Bank of America trimmed its forecast for semiconductor sales growth this year to 7 percent from 11 percent.

Advanced Micro, National Semi

Advanced Micro Devices Inc., National Semiconductor Corp. and LSI Corp. were downgraded to ``sell'' from ``neutral.'' Advanced Micro fell 36 cents to $7.14, National Semiconductor lost $1.23 to $21.41, and LSI decreased 43 cents to $4.88.

Intel, Analog Devices Inc., Semtech Corp., Texas Instruments Inc. and Power Integrations Inc. were downgraded to ``neutral'' from ``buy.'' Texas Instruments fell $1.05 to $32.35 and Analog Devices sank $1.33 to $30.37.

The price-weighted Philadelphia Semiconductor Index fell 2.8 percent to the lowest since July 2006.

National City Corp., Ohio's largest bank, led declines in financial shares, falling 87 cents to $15.59 after cutting its dividend by 49 percent to offset losses in the housing market. Morgan Stanley, the second-biggest U.S. securities firm, fell $2.16 to $50.95. Fannie Mae, the largest provider of money for home loans, decreased $2.52 to $37.46.

`Second Shoe'

``If we get a cyclical drop in the economy then we have to worry about traditional credit losses coming in, which would be a second shoe to drop for the financials,'' said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities.

The Dow average gained 6.4 percent in 2007 and the Nasdaq rose 9.8 percent, its steepest yearly advance since 2003. The S&P 500's 3.5 percent increase extended to five years its streak of annual advances.

Wall Street strategists forecast gains for U.S. stocks in 2008. The S&P 500 may climb 11 percent in 2008, extending the five-year bull market, according to the average forecast from 15 strategists surveyed by Bloomberg.

Analysts are bullish even as economists predict a slowdown in the U.S. Gross domestic product probably grew at an annual rate of 1 percent in the final three months of 2007 and will expand 1.5 percent this quarter, according to the median forecast of economists polled by Bloomberg last month. That compares with 4.9 percent growth in the third quarter of last year.

`Not Good News'

``The manufacturing sector of the economy is indeed contracting and that's certainly not good news and contributes to the view that we're headed towards a recession,'' said Hugh Johnson, who oversees about $725 million as chairman of Johnson Illington Advisors LLC in Albany, New York. ``For the first part of this year when there's not a lot of confidence in earnings, the markets are not going to do well.''

Profits among S&P 500 members are forecast to rise 15.1 percent in 2008, the average estimate of analysts surveyed by Bloomberg, after growth slowed to an estimated 1.4 percent last year. Most of the gain is predicted in the third quarter, when analysts expect earnings to increase by 19.7 percent.

FedEx Corp., the second-biggest U.S. package-delivery company, slipped $3.01 to $86.16, a two-year low. Rising oil prices and slowing customer demand are ``meaningful risks'' this year, JPMorgan Chase & Co. said in lowering the shares to ``neutral'' from ``overweight.''

Crude Rally

Crude oil futures touched $100 a barrel for the first time, extending last year's 57 percent climb reflecting demand growth outpacing the industry's ability to find deposits. Schlumberger Ltd., the world's largest oilfield-services provider, rose $2.21 to $100.58. Energy shares were the only industry group in the S&P 500 to rise as natural gas futures also climbed, reaching a one- month high.

``My big worry is that fears of higher oil prices would continue to impact consumer confidence and it would continue to fall,'' said Barry James, president and portfolio manager at James Investment Research in Xenia, Ohio. The firm manages $2.1 billion.

Shares of department stores and discounters in the S&P 500 lost 2.1 percent. U.S. retail sales rose 2.3 percent last week at stores open at least a year as consumers slowed spending during what may have been the worst holiday shopping season in five years, the International Council of Shopping Centers said.

Retailer Stocks

Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, fell $1.03 to $28.36, a five-year low. J.C. Penney Co., the third-largest department store chain, declined $2.34 to $41.65.

Amazon.com Inc. was the biggest gainer in the group, adding $3.61 to $96.25, after Citigroup predicted market share gains and recommended investors buy the shares.

Newmont Mining Corp., the world's second-largest gold producer, rallied the most in the S&P 500 as the falling dollar pushed gold futures to a record $859.20 an ounce in London. Newmont added $3.56, or 7.3 percent, to $52.38. Barrick Gold Corp., the largest producer, rose $3.97, or 9.4 percent, to $46.02.

Interest-rate futures show the odds of a half-point cut on Jan. 30 increased to 26 percent from nothing, with the remainder of the bets counting on a quarter-point cut in the Fed's target for the overnight lending rate between banks.

Minutes of the Fed's Dec. 11 meeting, released today, showed policy makers perceived a need to ``remain exceptionally alert to economic and financial developments and their effects on the outlook.''

The Russell 2000 Index, a benchmark for companies with a median market value of $578 million, dropped 1.6 percent to 753.55. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 14,613.63. Based on its decline, the value of stocks decreased by $257.4 billion.

Advanced Micro Devices Inc. (AMD US)
Amazon.com Inc. (AMZN US)
Analog Devices Inc. (ADI US)
Barrick Gold Corp. (ABX US)
Bed Bath & Beyond Inc. (BBBY US)
Caterpillar Inc. (CAT)
Fannie Mae (FNM US)
FedEx Corp. (FDX US)
Intel Corp. (INTC US)
International Business Machines Corp. (IBM US)
J.C. Penney Co. (JCP US)
LSI Corp. (LSI US)
Morgan Stanley (MS US)
National City Corp. (NCC US)
National Semiconductor Corp. (NSM US)
Newmont Mining Corp. (NEM US)
Power Integrations Inc. (POWI US)
Schlumberger Ltd. (SLB US)
Semtech Corp. (SMTC US)
Texas Instruments Inc. (TXN US)