Stocks closed lower Friday after a profit warning from J.C. Penney renewed fears about slower consumer spending. Financials and techs caved in after earlier attempts to rally.
A third straight day of declines was enough to erase gains from the rally at the start of the week triggered by JPMorgan's upgrade to $10 a share for Bear Stearns. The Dow Jones Industrial Average and S&P 500 finished down more than 1 percent for the week.
The Nasdaq finished flat for the week but today's losses were enough to push the tech-heavy index back into bear-market territory, down 21 percent from its October high.
Still, all three indexes are up more than 2 percent in the past two weeks since news of the Bear Stearns bailout and extraordinary measures by the Federal Reserve were announced.
The resilience we've seen in March has been an encouraging sign after weakness in January and February. The consensus is that the market has found a bottom and that better times are ahead in the second quarter.
Tech Rally Fizzles
Tech stocks, which are down about 15 percent so far for the quarter, held on longer than most sectors today, but eventually caved in to the selling pressure.
Among the remaining holdouts were BlackBerry maker Research In Motion , which gained 2.8 percent after RBC Capital raised its price target on the stock, and Apple , which rose 2 percent after Bank of America said the company is getting ready to roll out iPhones using 3G technology, which uses higher bandwidth and allows for global roaming.
In economic news, consumer confidence fell to a 16-year lowat the end of March, according to a report from the University of Michigan.
Analysts pointed out that consumer confidence is clearly in recession mode, though spending isn't. Consumer spending ticked up 0.1 percentin February, a weak reading but still better than the 0.1 percent decline expected.
J.C. Penney shares fell 7.5 percent after the mid-tier department store lowered its first-quarter earnings forecast, saying sales through the Easter holiday were "well below expectations."
Competition from lower-priced retailers like Wal-Mart spurred JPMorgan to cut its rating on Bed, Bath & Beyond to "underweight" from "neutral."
There's also concern that spending on the high end is slowing. Merrill Lynch cut its rating on Tiffany to "neutral" from "sell," and downgraded online jeweler Blue Nile to "sell" from "neutral."
On the inflation front, the government's report on consumer income and spending showed that the core PCE price index, an inflation gauge closely watched by the Fed, rose 2 percent year over year, the top of the Fed's comfort zone. In the Michigan survey, the 12-month inflation forecast climbed to 4.3 percent from 3.6 percent in February, while the projection for inflation in five years dropped to 2.9 percent from 3 percent last month.
Bear Holds Above $10; a Boost for Lehman
In the financial sector, the big buzz was that Bear Stearns CEO Jimmy Cayne is selling his stock in the company. He's getting about $60 million for a stake once valued at closer to $1 billion. Bear Stearns shares fell 4 percent to $10.78.
Lehman Brothers shares declined 2.2 percent even after Citigroup advised clients to start buying shares of the stock, which has been battered by shorts convinced the brokerage is going to be the next to collapse.
"It's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money," Citigroup said.
Overall, financials were rattled after Oppenheimer analyst Meredith Whitney said banks such as Citigroup and Wachovia are likely to announce dividend cuts in Aprilas earnings won't support the current level of dividends.
Citigroup, the largest U.S. bank, is also said to be working on hiring an outsider to take over its flagging U.S. consumer business, according to a report in the Wall Street Journal.
Boston Fed President Eric Rosengren called for more detailed reports from bankson how they respond to problems amid concerns that troubles of U.S. banks could grow as the economy slows down.
U.S. money manager Legg Mason said Friday that it is mulling options for providing liquidity to holders of auction-rate preferred securities issued by seven closed-end funds of its affiliates.
On the home front, KB Home shares dropped nearly 5 percent after the homebuilder reported it swung to a lossamid impairment and abandonment charges and said it didn't expect conditions to improve in the near term.
A day earlier, Lennar posted a quarterly loss but beat estimates. That coupled with a lower-than-expected decline in new-home sales and a slight decline in inventories had offered some hope that a turnaround may be brewing for the housing sector. But both homebuilders stressed that, until prices and consumer confidence rebound, inventory levels are going to remain out of whack with demand.
Responding to a question about a proposal from Democratic presidential contender Hillary Clinton, a housing official said the the idea of freezing mortgage rates for any length of time would be a mistake.
"You'd really cause market dislocations," said James Lockhart, the director of the Office of Federal Housing Enterprise Oversight Director. "I think we're going to let the market work and interest rates have come down dramatically and people are going to be able to refinance," Lockhart said. (View the full interview, and more comments.)
On Tap for Next Week:
MONDAY: Chicago PMI; Fed's Yellen speaks; End of first quarter
TUESDAY: Auto sales; ISM manufacturing index; construction spending
WEDNESDAY: MBA applications; factory orders; oil inventories; Bernanke testifies; Earnings from Monsanto, Best Buy, Research In Motion
THURSDAY:Jobless claims; ISM services index; Fed's Yellen speaks
FRIDAY: Jobs report
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