Tuesday Wrap: Markets Tumble After Fed Rate Cut

Includes: DIA, IEF, QQQ, SPY
by: Roy Mehta

The bottom fell out of the markets fell after the Fed announced it would lower the federal funds target rate by 25 basis points to 4.25% as expected. The Dow Jones Industrial Average dropped 294.3 points (-2.1%), Standard & Poor's 500 index fell 38.3 points (-2.5%), and the Nasdaq decreased 66.6 points (-2.5%). Volume on the NYSE came in at 1.54 billion shares, and decliners trounced advancers by a ratio of about 5:1.

Though the 25 basis point cut was expected, some were disappointed the Fed was not more aggressive (full story). Most of the Fed's statement talked about tempered economic growth, referencing the housing correction, shaky financial markets, and inconsistencies in consumer and business spending, and left the door open to more rate cuts in the future. After the announcement, the U.S. 10-year Treasury rallied 1-18/32 in price, pushing yields down to 3.97%.

Not only did every sector finish in the red, all but three finished more than 2% down. Crude gained $2.16 to $90.02/barrel. Before the open, Washington Mutual (WM, - 12.4%) announced it was cutting its dividend and selling preferred stock (full story). Later, GE (GE, -1.0%) reaffirmed its guidance for this year, but forecasted earnings for 2008 that fell short of expectations. Freddie Mac (FRE, -10.6%) was down after its CEO said it could lose another $5.5-$7.5 billion in the next couple years if the housing and credit markets stay weak. H&R Block (HRB, -3.3%) missed analyst estimates for the most recent quarter and said its yearly results would probably come in on the lower side of targets. AT&T (T, +4.1%) announced an increase in its dividend and a new 400 million share buyback plan (full story).

International Trade (8:30 AM), Import and Export Prices (8:30 AM), Quarterly Services Survey (10:00 AM), and the EIA Energy Petroleum Report (10:30 AM) are all due out Wednesday. Traders will be looking ahead to the PPI and CPI later this week.

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