U.S. stocks were bloodied on Wednesday, as the technology-heavy Nasdaq went on a gut-wrenching dive to a 21-month low on recession worries, corporate earnings warnings, and downgrades on high-tech stalwarts like Cisco Systems and IBM.
Investors dumped high-tech stocks in a deep and wide sell-off but the mauling stretched to blue chips as well, a day after the U.S. Federal Reserve warned the U.S. economy risked facing further slowdown.
The Nasdaq Composite Index .IXIC) plunged 178.94 points, or 7.12 percent, at 2,332.77, its worst close since March 1999. Nasdaq, which had its seventh down day in a row, is now off more than 53 percent from its March 10 closing peak at 5,048.62.
It was the seventh largest decline ever for the composite in percentage terms. In points, the drop did not make the top 10 list.
A fresh batch of corporate profit warnings, including one from International Paper Co., the world's largest paper company, came on top of downgrades on high-profile technology companies like Web infrastructure company Cisco Systems and International Business Machines, the world's largest computer company.
"Confidence is being trimmed back by the combustible combination of a slowing U.S. economy, earnings disappointments and the Fed's inability to lower interest rates immediately," said Alan Ackerman, market strategist, Fahnestock and Co. "The mood is glum and perplexing."
The blue-chip Dow Jones industrial average .DJI) fell 265.44 points, or 2.51 percent, at 10,318.93 while the broader Standard & Poor's 500 Index .SPX) shed 40.86 points, or 3.13 percent, at 1,264.74, its worst level in more than a year.
The outlook for U.S. stocks worsened in extended hours trading on Wednesday, after long-distance cable and television giant AT&T issued yet another warning of slower-than-expected revenue growth and announced it was slashing its dividend for the first time in its 100-year history. Shares fell further to $17-1/2 on the Instinet electronic brokerage system, after closing down nearly 8 percent, at $18-15/16.
During the regular session, investors were spooked after one of Wall Street's leading brokerages, Merrill Lynch, soured on IBM and computer boxmaker Hewlett-Packard Co., cutting their investment ratings and warning clients it saw companies buying fewer computer systems from them.
Shares of both IBM and H-P fell sharply on the New York Stock Exchange, hitting new 52-week lows at $84-13/16 and $29-7/16, respectively, and weighing down heavily on the 30-company Dow gauge. IBM closed $4-1/8 lower at $86 and H-P 7/8 at $30-7/16.
Cisco Systems led Nasdaq's fall. The Internet gear maker, which was Nasdaq's most actively traded issue, touched a fresh year low of $35-45/64 for a decline of over 13 percent after Merrill Lynch cut its investment rating, blaming a slowdown in technology spending.
Cisco closed $5-1/4 off at $36-1/2, and the selling hit the stocks of other sectoral firms like Network Appliance and Juniper Network, sending the S&P Computer Networking index .SPLANS) down more than 12 percent.
Media stocks, both traditional players like Time Warner and Internets like InfoSpace Inc., were among the worst performing groups. But the selling was indiscriminate, hitting the shares of software companies, computer networkers, telecommunications, computer makers and semiconductor issues. Trade volume was extremely heavy, with 2.78 billion shares changing hand on Nasdaq.
The brave-hearted buyers who ventured into the stock market bet on defensive utilities and pharmaceutical stocks, which are among the year's good performers.
Buying on the dips is quickly becoming a market myth; as many stocks show little bounce and keep making new lows, Fahnestock's Ackerman said. "It's a time for people to keep cash and remain cautious," he noted.
The tech sector again bore the brunt of the selling as many stocks remain overvalued, despite their pullback from year-highs, especially considering the likelihood of economic slowdown, analysts said. Some 926 stocks hit new lows for the year on Nasdaq, where four stocks fell for each one that rose.
"We are having a revaluation of (price-to-earnings) multiples, led by the technology sector," said Joseph DeMarco, managing director of equity trading at HSBC Asset Management Americas, with about $12 billion in assets under management.
"The momentum certainly is carrying forward from yesterday after the expectations of a Fed cut in rates were not met. But more importantly, the market is just focusing on what appears to be a slower economy."
The Fed on Tuesday left short-term interest rates unchanged, but signaled its readiness to cut them in future to stop the economy from moving into a recession.
The U.S. central bank laid out a "laundry list of what is wrong with the patient," brokerage Bear Stearns told clients in a note: eroding consumer confidence, a drag on demand from profits, rising energy costs, shortfalls in sales and earnings - all of which suggest economic growth might be slowing further.
International Paper Co., a Dow component, edged down $1-7/8 to $37-5/8 on the New York Stock Exchange. The world's largest paper and wood products company said earnings would fall below estimates, partly because of rising energy costs.
A profit warning came from Siliconix Inc., a maker of specialty integrated circuits, on Tuesday. Its shares shed $4-15/16 at $20-1/2, a decline of over 19 percent.
Networking equipment maker Foundry Networks Inc. plunged 57 percent, or $17-5/8, to $13 on Nasdaq after warning earnings would lag estimates due to a shift in spending on communications infrastructure. The stock, which slid to a new 52-week low of $12-1/16, had a year high of $212.
Jabil Circuits Inc., a leading contract electronics manufacturer, skidded 22 percent, after posting disappointing profits, while Extreme Networks Inc. lost $14-1/16 to $34-1/2 after SG Cowen cut its rating, saying shares of the computer networking company seemed overvalued and would be hurt by a slowing economy.
"Every day you are getting new downgrades and (target) price cuts that add fuel to the downside fire," said Arnie Owen, managing director of capital markets at Roth Capital Partners. "It's end-of-season tax selling and at the same time you have earnings fears."