Recession is going to get worse

Stocks Fall on Fed Warning

By PETER A. MCKAY and ROB CURRAN
U.S. stocks dipped into the red Wednesday afternoon as a bounce for banks waned and the Federal Reserve warned that their expectations for the depth of the recession worsened in the last three months.

Officials also projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure, according to April meeting minutes. However, the outlook appeared to have brightened somewhat between the March and April meetings.

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Recently, the Dow Jones Industrial Average dipped 2 points to 8472 after earlier trading up more than 100 points at 8591, which would be its highest close since January. J.P. Morgan Chase was down 2.2% to $35 and American Express fell 1.1% to $24.54. Hewlett-Packard also weighed on the index, off 4.8% to $34.81, after it posted a 17% skid in earnings.

The tech-heavy Nasdaq Composite Index was up 0.3% to 1740. The S&P 500-stock index was off slightly at 908, hurt by a 2.5% dip in financial stocks.

"Although the credit shock has subsided, the housing shock clearly has not, nor has the shock in the labor market as we continue to lose more than 500,000 jobs [a month]," said David Rosenberg, chief economist and strategist for Toronto's Gluskin Sheff & Associates.

Financial stocks had climbed earlier after Bank of America said it completed a stock sale that raised $13.5 billion in capital. The government recently ordered the bank to replenish its capital after the recent stress tests of 19 lenders. Shares of the bank were up about 2.8%, off the best levels of the session.

Like most market participants on Wednesday, floor broker Ted Weisberg welcomed Bank of America's offering as a sign that the market's long-term fundamentals are improving. He shrugged off the broader financial sector's weakness Wednesday as a pause in its rally from its March lows.

An exchange-traded fund tracking the S&P's financial sector had rallied almost 95% coming into Wednesday's action, compared to a 34% in the index as a whole. "We're just dealing with a stock market that was defying gravity," said Mr. Weisberg, who had previously bought Bank of America shares but has stayed on the sidelines of Wednesday's rally.

Treasury Secretary Timothy Geithner said in testimony to the U.S. Senate Banking Committee that the 19 stress-tested banks have raised more than $56 billion in funds to date, including $34 billion in offerings of common stock. Investors had mostly welcomed those deals as confirmation that Wall Street is getting back to normal functioning after a period in which companies' ability to raise capital at any price was essentially frozen.

"The rash of secondaries we've seen and the way they've been scarfed up has been pretty impressive," said portfolio manager Uri Landesman, of ING Investment Management in New York. "It's taken a lot of liquidity out of the market, but at the same time, we're still seeing buying in other areas of the market. That tells me we're seeing some real money come off the sidelines for investment," rather than short-term trading.

But some deals have garnered a tepid reception. Regions Financial said that it plans to raise $1.25 billion through an offering of common and new mandatory convertible.


Bloomberg News/Landov

Frank Cannarozzo at the New York Stock Exchange May 20. Morning gains eroded on a slide for bank stocks.
Oil futures surged above $62 a barrel, a six-month high after a drawdown in gasoline inventories. After sliding below 30 for the first time since September on Tuesday, the CBOE Volatility Index slid another 0.2% on Wednesday to 28.75.

Oil and energy stocks have been on a tear amid a renewed round of speculation and optimism that the U.S. economy is due for a rebound that could bolster fuel demand. Many traders have argued that the rally is due for a correction in light of robust U.S. stockpiles of crude and refined fuels heading into the peak post-Memorial Day travel season.

According to the Energy Information Administration, U.S. reserves of crude and gasoline fell faster than expected last week. Crude reserves were down 2.1 million barrels versus expectations of a 700,000 barrel draw. Gasoline reserves were down 4.3 million barrels, compared to expectations of a 1.2 million draw, according to a Dow Jones Newswires survey.

"Gasoline is probably the most balanced of the energy products in terms of the fundamentals right now," said Tom Bentz, vice president at BNP Paribas Commodity Futures in New York. "But even there, we're not seeing any shortages anywhere. The bottom line is that the market is really trading now on sentiment and other things than the fundamentals."

Retail gasoline prices have risen more than 13% over the past month but are still down nearly 40% from a year ago, according to the driving club AAA.

Shares of all types of commodity producers gained. Rio Tinto was higher by 6.6% to $179.48, BHP Billiton gained 1.9% to $54 and U.S. Steel rose 7.8% to $32.27.

Deere was up 1.6% after it announced a 38% slide in fiscal second-quarter profit that nevertheless beat analysts' expectations. The equipment maker also forecast a pickup in farm activity for 2010. Chip maker Analog Devices announced a 93% slide in first-quarter profits, but its executives said they expect a recovery in the semiconductor sector in the first half of this year. Investors chose to focus on those comments, resulting in a 15.5% surge in Analog shares.

Stephen Lieber, chief investment officer at Alpine Woods Capital Investors, said that Wednesday's market action could be represenative of things to come in the next few months, with a few stand-out names amid an otherwise ho-hum performance in major indexes.

Alluding to the minutes of the Federal Reserve's April rate meeting released on Wednesday, Mr. Lieber said: "If you look at it, they're not forecasting any sort of immediate recovery. But you can still get some selective strength in the equity market in an environment like that."

In the minutes, Fed officials projected a deeper U.S. recession than they previously expected, and they opened the door to buying more mortgage-backed and Treasury securities to help stabilize the financial system.

—Geoffrey Rogow, Min Zeng and Brian Blackstone contributed to this article.
Write to Peter A. McKay at peter.mckay@wsj.com and Rob Curran at robert.curran@dowjones.com