Stocks closed lower as weak sales from Macy's and an inflation warning from a Federal Reserve official put a damper on the market's earlier bounce.
The Nasdaq shed 1.3% as a pending earnings report from networking-gear maker Cisco Systems kept tech investors on edge. The Dow Jones Industrial Average and S&P 500 index, which posted their biggest one-day losses since Feb. 27 on Tuesday, also finished lower.
Philadelphia Fed President Charles Plosser warned that inflation remains a big concern for the central bank. "Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help,'' Plosser said. This came a day after Richmond Fed President Jeffrey Lacker spooked investors by saying a "mild recession" is possible.
Barry Armstrong, a financial planner at Securities America Advisors in Boston, says he's looking to Thursday's weekly jobless claims for signs of weakness in the economy. "The barometers I'm watching are -- construction jobs are rapidly being lost. The mortgage industry and banks have started laying off a lot of people," Armstrong said. As for the headline number, "anything over 350,000 is recessionary," he said. Economists expect the number to come in just shy of that, at 347,500 jobless claims.
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.
Cisco shares slipped ahead of the company's earnings report. After the closing bell, the world's largest maker of routers, switchers and other networking gear, reported earnings in-line with estimates, helped by demand from telephone companies. That was an encouraging sign, given that many market watchers were expecting Cisco's results to reflect a slowing economy and lower business spending. In November, comments from Cisco chief John Chambers about a dramatic drop in orders sent the company's stock -- and the tech-heavy Nasdaq -- tumbling.
The Cisco report is the latest sign of an emerging trend: Excluding the troubled financial sector, earnings reports have been surprisingly good.
"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.
Armstrong is also a fan of financials. He's been accumulating Bank of America, as well as Sovereign Bancorp and Washington Mutual, all based on valuations.
"From what I've seen historically," Armstrong said, "when a bank has a problem with loans, they overstate the degree of the loss." The reason is simple: "They don't want to have to go back to Wall Street and beg for forgiveness for the same sin!" Armstrong explained.
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.
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.
"Disney is an interesting earnings piece because that's discretionary income," Baum said. The company gets "a lot of European inflow -- Europeans going to the theme parks because of the weak dollar."
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.
The Mortgage Bankers Association reported Wednesday 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.