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Stocks Fall on Rate Hike Second Thoughts

Posted on: Wednesday, 11 August 2004, 06:00 CDT

NEW YORK - The bears returned to Wall Street on Wednesday, sending stocks sharply lower as a downbeat outlook from Cisco Systems Inc. weighed on technology shares and investors started having second thoughts about this week's interest rate hike.

A sales warning from National Semiconductor Corp., which was downgraded by brokerage firm Smith Barney, added to the pressure on the technology sector. The sell-off nearly erased the impressive gains of the previous session, and led the rest of the market lower.

Volatility in oil prices also contributed to investor worries, though crude futures posted modest declines after Saudi Arabia signaled it could raise its production output if necessary. Oil was down 20 cents at $44.32.

"We keep coming back to the same concern: crude oil prices," said Ken Tower, chief market strategist for Schwab's CyberTrader. "Until there is some sign that crude oil is starting to come down ... and stabilize, I think everybody is going to remain very uncertain about how much of a slow down in growth we will have."

In early afternoon trading, the Dow Jones industrial average was down 45.20, or 0.4 percent, at 9,899.47.

Other gauges also remained negative. The tech-dominated Nasdaq composite index fell 35.49, or 2 percent, to 1,773.21. The Standard & Poor's 500 index shed 7.13, or 0.7 percent, to 1,071.91.

Tuesday's much-anticipated rate hike, which brings the federal funds rate to 1.5 percent, did little to impress investors, who were more focused on the Federal Reserve's upbeat assessment of the economy. The Fed's Open Market Committee blamed much of the recent slowdown on high energy prices, and said the economy was poised to improve. But the suggestion that more rate hikes were ahead gave investors some pause.

A recent deceleration in earnings, combined with ongoing concern about climbing oil prices, inflation, potential terrorist attacks and the upcoming election, has provoked a good deal of pessimism in the market. While the unknowns are worrying, most analysts agree the market's underlying fundamentals remain strong.

But Cisco's after-the-bell report on Tuesday did little to quell fears about the second half of the year. The networking company beat earnings expectations, but its cautious outlook on corporate technology spending rattled investors, and several brokerage firms downgraded the stock. Cisco shed 9.9 percent, or $2.03, to $18.43.

National Semiconductor sank 15 percent, or $2.36, to $13.34, after it said revenues for the current period were likely to miss forecasts. The company blamed the slowdown on a drop-off in orders. Its remarks raised alarm among analysts, and Smith Barney lowered its rating from a buy to a hold.

The Walt Disney Co. was down 66 cents at $21.78, despite reporting earnings that beat expectations, with a jump in profits on higher theme park attendance and growth in its cable networks.

Declining issues outnumbered advancers by more than 5 to 2 on the New York Stock Exchange. Volume came to 747.22 million shares, compared to 595.47 million traded at the same point Tuesday.

The Russell 2000 index, which tracks smaller company stocks, was down 6.84, or 1.3 percent, at 522.99.

Overseas, Japan's Nikkei stock average finished 0.9 percent higher Wednesday. In Europe, France's CAC-40 and Britain's FTSE 100 each closed down 0.9 percent, while Germany's DAX index was down 1.1 percent in late-day trading.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

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