A weak sales and job-cut announcement from Macy's and comments from a Federal Reserve official put a damper on the stock market's bounce.
Bargain hunters had bid up the market following a two-day rout and some encouragement gleaned from Disney and Time Warner earnings. The Dow Jones Industrial Average and S&P 500 index on Tuesday post their biggest one-day declines since Feb. 27. The catalysts for Tuesday's super selloff was a sharp drop in a gauge of the services sector, which accounts for 80 percent of the U.S. economy, and comments from a Fed official, who said a "mild recession" is possible.
Richmond Federal Reserve President Jeffrey Lacker, who spooked investors Tuesday by saying a "mild recession" is possible, was back at it on Wednesday, saying that the central bank is worried about both recession and inflation, particularly since past expectations that energy prices would ease had consistently been off track.
"We keep missing and it poses a dilemma for us," Lacker, who is not a voting member on the Fed's policy-setting panel this year, told students at Marshall University.
Macy's skidded after the department-store operator said it planned to cut 2,300 management jobs as part of a regional consolidation. The retailer said same-store sales dropped 7.1% in January from a year ago and lowered its estimated range for fourth-quarter earnings.
Another thing keeping investors on edge is the looming earnings report from Cisco Systems, due out at 4 p.m. ET. The world's largest maker of routers, switchers and other networking gear, was hit in November by a dramatic drop in orders from U.S. banks squeezed by the credit crunch. The news of weaker demand sent Cisco shares -- and the tech-heavy Nasdaq -- tumbling. Analysts are expecting earnings of 38 cents a share, compared with 33 cents a share a year earlier. Investors bid the shares higher. To get a sneak peek of what to expect, check out Jim Goldman's Tech Check blog and By the Numbers.
"Hedge-fund money has really increased volatility" as trades on the day's headlines produce wild swings, said Nadav Baum, managing director of investments for BPU Investment Management. Long-term investors have to ask themselves, "can we handle the volatility?" If the answer is yes, there are some great bargains to be had.
"Today, there's a lot of great bargain hunting," said Baum, who likes financials. His picks include real-estate trusts, "big money-center banks" like Bank of America and J.P. Morgan , and high-quality insurance companies such as MetLife and AIG.
Oil prices receded after the U.S. announced oil inventories rose for a fourth straight week. The front-month contract for light, sweet crude oil fell below $87 a barrel at one point . The U.S. gasoline supply surged to its highest level in nearly 14 years.
"The crude build was enormous," oil analyst Amanda Kurtzendorfer of Summit Energy in Louisville, Kentucky, told Reuters. "The margins just aren't there for the refiners to run full out. I expect the build in inventories to continue."
The Labor Department reported earlier that the rate of worker productivity growth slowed to a 1.8 percent annual rate in the fourth quarter but still topped economists' expectations of a 0.4 percent rise. Labor costs increased 2.1 percent.
Investors will also have the Super Tuesday primary results to digest. Sen. John McCain extended his lead in the Republican contest, while Senators Clinton and Obama remained in a tight race on the Democratic side.
Disney was the biggest gainer on the Dow after the media and entertainment giant reported its net fell 27%, but earnings blew past expectations amid strong results from its theme park, media and consumer products groups.
Alcoa and American Express rounded out the top three Dow leaders.
Alcoa may have benefited from news that Rio Tinto has rejected BHP Billiton's $147.4 billion hostile bid for the mining company, which would be the second-largest deal in corporate history if it goes through. Chinese state-owned aluminum company Chinalco and Alcoa recently purchased a joint 9 percent stake in Rio. Rumors are swirling that Chinalco is planning to increase its stake in Rio.
American Express , whose stock took a beating this week after an analyst downgrade on Monday, has a semi-annual financial meeting tonight.
Time Warner shares rebounded as investors found some encouraging details in the media giant's earnings report. The company said it missed quarterly profit expectations by a penny and reduced its full-year profit growth target. However, the second-largest U.S. cable operator reported increases in broadband and phone subscribers as well as sales of "Harry Potter" home videos. The company also said it could still top Wall Street's expectations for 2008 profits.
Shares of Toll Brothers wavered after the largest U.S. luxury home builder said on Wednesday that it expects to report a 22 percent drop in fiscal first-quarter home-building revenue amid a dire housing market. Toll said it expects home-building revenue of $842.7 million for the quarter, down from $1.09 billion a year earlier. Official results are due out on Feb. 27.
In other economic news, the Mortgage Bankers Association reported that U.S. mortgage applications, which include both purchase and refinance loans, rose to their highest level in nearly four years last week, fueled by demand for home-purchase loans.