Russell 2000 skids on subprime worries
The Russell 2000 (NYSE: IWM) and the Dow fell as stocks reacted to news of more subprime woes. The small-cap index dropped 3.98 points, or 0.47%, to 845.91. The Dow Jones Industrial Average (INDU) lost 53.33 points, or 0.38%, to a record close of 13,918.22.
Once again, subprime mortgage problems downed stocks.
News that two hedge funds managed by Bear, Stearns & Co. (NYSE: BSC) have become essentially worthless – one has imploded completely while the other has lost over 90% of its value – pushed the major U.S. indices down as soon as trading began.
The funds had made bets on sub-prime mortgage bonds, which turned problematic when housing prices started declining and delinquencies and foreclosures increased.
The tech sector contributed to the bearish mood, with troubled search engine Yahoo! Inc. (Nasdaq: YHOO) posting a decline in quarterly profit, while chip maker Intel Corp. (Nasdaq: INTC) reported that second-quarter profit margins fell short of its expectations.
Investors were also paying attention to U.S. Federal Reserve Chairman Ben Bernanke’s testimony to the House Financial Services Committee today.
Not surprisingly, the head of the central bank said that he remains focused on inflation. Bernanke cautiously predicted that core inflation could decline slightly toward the year and said economic growth should pick up to a moderate pace.
The markets interpreted that as a sign that the federal funds rate will mostly likely stay at 5.25% for the foreseeable future, which helped stocks narrow their losses. The Russell 2000 was down more that 1% this afternoon.
The Fed Chairman will continue his semiannual report on monetary policy with an appearance in front of the Senate Committee on Banking, Housing and Urban Affairs on Thursday.
With news of the latest ripple from the subprime meltdown dominating, investors largely disregarded reports of generally positive economic data.
The U.S. Labor Department reported that the consumer price index added 0.2% in June, the smallest increase since January. Core inflation, which is the Fed’s preferred gauge, is on pace to rise 2.3% this year, compared with 2.6% during 2006.
Elsewhere, builders started work on 2.3% more houses in June compared with the revised figure for May, according to the U.S. Census Bureau.
No one took that as a sign that housing sector is on the road to improvement because building permits, which measure plans for future construction, fell 7.5% in June to a seasonally adjusted annual rate of $1.406 million.
