Lowered expectations keep Dow down
514-point drop follows key earnings reports
Worried investors turned their attention from financial rescue efforts to corporate earnings yesterday in a bid to gauge how much the Wall Street meltdown has spilled over into the broader economy.
They didn't like what they saw.
With several big companies posting losses or lower earnings, and even more warning that business looks to be weak deep into next year or beyond, the Dow Jones industrial average retreated 514.45 points, down 5.69 percent, to 8,519.21.
"The earnings data coming out are cautionary," said Rob Lutts, chief investment officer for Cabot Money Management Inc. in Salem. "What's really bothering investors is the expectations companies are putting out for the next two to three quarters. Expectations are being lowered, and they're being lowered by 15 to 20 percent. Everybody's playing defense, and the market is starting to sense that."
Investors were even gloomy over crude oil futures tumbling to a 16-month low of $66.75 per barrel - the lone silver lining for consumers and fuel-reliant businesses yesterday - because it served to underscore that the economic downturn is accelerating.
Many of the company reports were downbeat at the start of an earnings season that is shaping up as a barometer for investors.
Aircraft builder Boeing Co., pharmaceutical giant Merck & Co., and Internet portal Yahoo Inc. all reported lower profits for the three months ending Sept. 30, as both Yahoo and Merck dis closed plans to cut thousands of jobs in response to the slowing economy. Wachovia Corp., the troubled financial holding company that agreed to be acquired by Wells Fargo & Co., posted a $24 billion third-quarter loss.
The news wasn't all bad. A pair of Massachusetts bellwethers, biotechnology company Genzyme Corp. of Cambridge and data storage provider EMC Corp. of Hopkinton, beat analysts' expectations, as did consumer technology innovator Apple Inc. But in their guidance, their signal to investors of what to expect in coming quarters, Apple and EMC warned of tougher times, with a deteriorating business environment likely to hold down their sales throughout 2009 and possibly longer.
"Investors are either fearful or greedy," said David Daglio, portfolio manager for Boston Company Asset Management, a unit of Bank of New York Mellon Corp. "Fear is taking over as third-quarter earnings come out, and the guidance is absolutely abysmal."
Some investment professionals pointed to "distress selling" by individuals and institutions as other major stock indexes also extended their losses yesterday. The tech-heavy Nasdaq Composite index shed 80.93 points, or 4.77 percent, to close at 1,615.75. And, the Standard & Poor's 500 index plunged 58.27 points, or 6.1 percent, to 896.78.
"My goodness, people are just selling everything," said John A. Carey, executive vice president and portfolio manager for Pioneer Investment Management Inc. in Boston. "There are opportunities for patient investors at these levels. I think a lot of stocks are attractively priced now for the longer horizon, three or four years out."
Investors were focused on the short term, however, and particularly the upcoming holiday season. Diminished prospects for Apple, with its wildly popular iPhone and iPod products, were especially disturbing to many market watchers. "This is a company that had been winning on all fronts," Lutts noted. "They have great products, but now they're clearly afraid that their sales are going to be slowing."
More earnings are scheduled to be released in coming days, with Waltham defense contractor Raytheon Inc. and a slew of other companies preparing to post results this morning. But the first round of earnings reports appeared to convince investors that the "real economy" won't be spared from the disruption set off in the financial world.
Still, some investment professionals suggested part of the reduced guidance may be an attempt by corporate managers to lower expectations so they could surpass them in coming quarters.
"No one wants to stick their neck out and say, 'I'm going to be doing great,' " said Lutts. "They all want investors to know this is going to be a difficult period."
Robert Weisman can be reached at weisman@globe.com. 