US stocks were sharply lower on Tuesday and while the market was off its worst levels of the day, the Federal Reserve's rate cut failed to arrest the pessimism about the US economy and corporate earnings.
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About an hour before the opening, policymakers announced a rate cut of 75 basis points, slicing the Fed funds rate to 3.5 per cent. This was the biggest US rate cut since the October 1984 cut of 175bp. Initially, the move caused S&P stock futures to jump, but within 30 minutes they were lower than just before the cut was announced.
Alan Ruskin, chief international strategist at RBS Greenwich Capital, said: "Plainly the Fed realised that to try [and] stay ahead of the market they had to act immediately."
The US markets were closed on Monday for the Martin Luther King holiday. The benchmark indices reopened sharply lower, extending their big losses from last week, with the bearish tone accelerated by heavy selling across global markets.
Traders said an avalanche of sell orders had overwhelmed the stimulus of the Fed's rate cut.
At mid-afternoon, the S&P 500 was down 1.1 per cent at 1,311.02, having bounced back from a fall of 3.8 per cent in early trade. It has now fallen nearly 11 per cent this month.
Equity volatility, as measured by the Vix index, surged 38 per cent to 37.57 and eclipsed the peak set in August when credit and mortgage problems took their toll on the banking sector and the broad market. At mid-afternoon, the Vix was up 13.5 per cent at 30.84.
The rate cuts and the prospect of more to come sparked a rebound in financial shares, with the S&P sector up 2.1 per cent, although it remains lower by around 11 per cent since the start of the year.
The Fed holds its scheduled January meeting next week and the market expects at least a 25bp cut and possibly 50bp in the funds rate.
"More obviously the Fed feels that they need to get rates down rapidly, and the quicker they get rates to a point where it validates or more likely goes beyond what the market is pricing in, the better," Mr Ruskin said.
Apart from financials and consumer discretionary, the rest of the major sectors in the S&P were lower, led by a 3.3 per cent fall in utilities and a 2.6 per cent slide in technology stocks. The latter is down more than 20 per cent from its high of October, meeting the definition of a bear market.
The Nasdaq Composite was down 1.8 per cent at 2,297.55, and has fallen nearly 20 per cent from its high of last year. Shares in Ebay fell 3.5 per cent to $27.33 after a report said Meg Whitman, the auctioneer's chief executive, was preparing to retire.
In spite of the sharp falls, some analysts said the time for the strategic buying of selected stocks loomed.
"It makes sense for investors to consider increasing their exposure to equities into the sell-off, gingerly or aggressively, depending on their investment horizon," said Thomas McManus, chief investment strategist at Banc of America Securities.
Marc Pado, chief market strategist at Cantor Fitzgerald said: "The question is recession and people are using the term loosely." He added: "Bond yields have been low for some time, while rate cuts and fiscal stimulus from the government will likely propel a strong rebound in the economy during the second half of 2008."
Mr Pado said large cap and growth stocks with exposure to the global economy should be favoured by investors at this time.
Of the main US benchmarks, the blue-chip Dow Jones Industrial Average had suffered the least selling pressure, although it was down 0.9 per cent at 11,993.87.
This week, several blue chips announce their fourth-quarter results, led by Microsoft, AT&T, Caterpillar and Honeywell. Investors hope that positive results will help arrest the current selling pressure in stocks.
Among the financials in the news was Bank of America, after it said fourth-quarter net income fell to $268m. The bank reported trading losses of $5.44bn due in part to writedowns of collateralised debt obligations. After an early fall to $33.12, the stock was up 3.6 per cent at $37.25.
Wachovia reported a 98 per cent fall in earnings as it wrote down $1.7bn and set aside $1.5bn to cover bad loans. The stock also rebounded from negative territory and was up 4.6 per cent at $32.22.
Meanwhile, Ambac Financial Group reported a loss of $3.26bn after taking a $5.21bn writedown. Fitch Ratings cut the bond insurer to AA last week, a move that has sparked concerns that other financial institutions, which have used the insurer to cover positions, will mark down their portfolios.
The stock had risen 33.1 per cent to $8.25 after the chief executive said they were seeing strong interest from a number of parties about injecting capital into the insurer.
Shares in Dupont were up 0.4 per cent lower at $42.85, after the chemicals maker posted a quarerlly earings fall of 37 per cent from a year ago, when one-time items boosted results. Excluding those items, profit rose sharply buoyed by international sales.
UnitedHealth said quarterly earnings rose 3 per cent and it was 6.1 per cent lower at $51.10.
Johnson & Johnson, said quarterly profit rose nearly 10 per cent, boosted by higher revenues and the stock fell 1.1 per cent to $65.56.
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