Stocks finished a back-and-forth session mixed Thursday as investors grappled with weaker-than-expected economic data and weighed the chances of the Federal Reserve lowering interest rates.
Fed Chairman Ben Bernanke is expected to speak Friday at the central bank's annual conference in Jackson Hole, Wyoming, and said in a letter Wednesday to Sen. Charles Schumer that Fed policymakers are "prepared to act as needed" if the market's turmoil damages the economy. The Fed's next meeting is Sept. 18, but some on Wall Street expect the central bank could act sooner.
The Commerce Department said second-quarter gross domestic product grew 4.0 percent _ its fastest pace in more than a year, and well above the 0.6 percent increase in the first quarter. But the broadest measure of economic health came in slightly lower than many anticipated, and the report also suggested that business investment, not consumer spending, was the main driver of growth.
In a sign that Americans' spending power may keep declining, the Labor Department said U.S. jobless claims rose last week to the highest level since April. Employment has been one of the stronger pillars of the economy recently, enabling robust consumer spending.
Considering how sluggish consumer spending has been this quarter, it's likely to post its worst back-to-back quarterly performance since early 2000, said Michael Strauss, chief economist at Commonfund. And given all of the mortgage market troubles, "There is a growing challenge for the economy to continue to grow at a 2.5 percent pace in second half of the year," he said.
To some investors, that's not bad news, because weaker-than-anticipated economic readings bolster the argument for a rate cut, which could loosen up the credit markets.
The Dow fell 50.56, or 0.38 percent, to 13,238.73 after dropping about 100 points early in the session.
Broader stock indicators finished mixed. The Standard & Poor's 500 index fell 6.12, or 0.42 percent, to 1,457.64, while the Nasdaq rose 2.14, or 0.08 percent, to 2,565.30.
In other economic news, the Office of Federal Housing Enterprise Oversight said U.S. home prices rose just 0.1 percent in the second quarter compared to the first quarter, the lowest quarterly increase since 1994.
A worse-than-expected quarterly earnings report from Freddie Mac due to troubles in mortgage lending fueled some selling early in the day, as did signs that companies are still finding that demand is low for commercial paper.
In addition, Lehman Brothers lowered its ratings on investment banks, stirring concerns about how well their profits will hold in a market where its tougher and more expensive to get deals done. Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley ended moderately lower.
In one possible bright spot, some investors regard the outlook for the technology sector as decent, giving the technology-dominated Nasdaq composite index an especially large boost.
Sigma Designs late Wednesday posted a strong second quarter profit which, excluding special items, beat Wall Street estimates. Sigma Designs rose $4.07, or 10.5 percent, to $42.70. Other tech stocks _ including Apple Inc., Cisco Systems Inc., Motorola Inc., and Advanced Micro Devices _ also saw solid gains.
Bond prices rose. The yield on the 10-year Treasury note, which moves inversely to its price, fell to 4.52 percent from 4.56 percent late Wednesday.
The credit markets have not completely sealed up, but bonds issued by companies are seeing much less demand than bonds issued by the government.
Asset-backed commercial paper outstanding decreased for the third straight week in the week ended Wednesday by 5.6 percent, the Federal Reserve said. That means that over all, 5.6 percent of asset-backed commercial paper was unable to be rolled over. Commercial paper comprises bonds issued by companies as a way for them to get cash quickly.
According to iMoneyNet Inc., in the week ended Tuesday, money market mutual fund investors drew cash out of prime funds _ some of which invest in commercial paper _ and instead padded their government fund assets.
The Fed injected a total of $10 billion (euro7.3 billion) into the banking system Thursday through repurchase agreements, in an ongoing effort to keep the markets liquid. A big reason behind the recent credit tightening has been defaults and delinquencies in subprime loans _ those given to borrowers with weak credit. The spike has led to losses for lenders and those who invested in mortgage-backed assets.
Fed funds futures have been pricing in a 100 percent chance of a rate cut for a while now, but Thursday they boosted the chance of a full-point cut by the end of the year to 100 percent.
Government-sponsored Freddie Mac, the second-largest U.S. buyer and guarantor of home mortgages, said its second-quarter profit dropped 45 percent, after it recorded larger provisions on its books for bad loans. Freddie Mac fell $3.18, or 5 percent, to $60.07.
The Russell 2000 index of smaller companies fell 4.21, or 0.53 percent, to 783.11.
Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange, where volume came to a light 1.03 billion shares compared with 1.2 billion traded Wednesday.