Stocks Retreat as Merck Bombshell Overshadows Fed Cut

Stocks gave up most of their day's gains late in the session Tuesday as a disappointing earnings forecast by pharmaceutical giant Merck & Co. Inc. outweighed hopes for an economic rebound spurred by the Federal Reserve's cut in interest rates.

The blue-chip Dow Jones industrial average tumbled 52 points, or 0.5 percent, to 9,868.40, while the technology-laden Nasdaq Composite Index edged up 5.37 points or 0.28 percent, at 1,997. The broader Standard & Poor's 500 Index held a slim gain of 5.51 points, or 0.48 percent, at 1,134.

"Merck's sudden meltdown has compressed the Dow's gains," said Alan Ackerman, senior vice president and market strategist at Fahnestock & Co. "There's little doubt that Merck has prompted sellers to take what little strength the market indexes had."

The Dow Jones industrial average had a short-lived foray above the psychologically-important 10,000 after the central bank cut interest rates for the 11th time this year. But all major stock indexes quickly turned tail after Merck lowered its 2001 profit forecasts.

In a widely expected move, the Fed cut its federal funds rate — a benchmark for short-term interest rates — for the 11th time this year to 1.75 percent, its lowest level in 40 years. Lower rates reduce borrowing costs for businesses and consumers, pumping up spending.

The central bank left the door open for more interest-rate reductions. The Fed said economic activity was still soft and there were tentative, preliminary signs that weakness in demand was abating.

The string of interest cuts so far have failed to halt a slide in stocks. In fact, the market has racked up its worst performance in the Fed's easing campaign in at least 50 years, according to research firm Year-to-date, the S&P 500 is down about 13 percent.

Merck's forecast put the brakes on a post-rate-cut rally. The drug company predicted flat sales in 2002, as patents on key drugs expire and growth slows for its blockbuster arthritis treatment Vioxx. Merck's stock fell $6.29, or 9.39 percent, to $60.70, after reaching lows unseen since March 2000.

Another casualty was Kroger Co. The stock of the largest U.S. grocer fell $3.38 to $19.92 and was the most active on the Big Board. The company will eliminate 1,500 jobs to cut costs and reported a 34 percent drop in quarterly income amid fierce competition with retailing giant Wal-Mart Stores Inc.

A better-than-anticipated forecast from Xilinx Inc. gave a boost to chip stocks, but biotechnology capped the sector's gains. Meanwhile, General Motors Corp. dragged on the auto sector and helped amplify the blue-chip Dow's move to the downside.

Mobile phone maker Nokia led the technology sector higher after saying it expects to beat its quarterly earnings target, thanks to a new range of Internet phones this Christmas season.

Nokia's bullish comments came on the heels of last week's reassuring forecasts from Web gear giant Cisco Systems Inc. Nokia was up $1.71 at $25.50. Motorola Inc., the world's second-largest maker of wireless phones, added 17 cents to $16.90. Swedish telecom equipment maker Ericsson gained by 19 cents to $6.00. Meanwhile, the Philadelphia Stock Exchange wireless telecom index edged back after the telecom rally, but managed to post a 2.45 percent gain on the day.

Xilinx, which designs customized chips for communications and industrial applications, rose 94 cents to $41.55 after it predicted a smaller-than-expected slide in sales.

The sector also got a boost after investment bank Salomon Smith Barney raised its target price for three chip equipment makers, based on a recent rally in their stock prices and expectations of a brighter outlook. KLA-Tencor Corp. rose 81 cents to $55.67. Teradyne Inc. rose 33 cents to $30.97.

Elsewhere, shares of eBay rose appreciably as signs appeared that the popular online auction site would perform well this holiday season, and could even surpass its fourth quarter earnings estimates. Shares of eBay soared by $3.10 to $70.10.

Compaq Computer Corp. lost 21 cents to $9.49, adding to Monday's loss. Hewlett-Packard Co. fell $1.01 to $21.99. Investors are worried the merger between the computer heavyweights may collapse after the founding families said they would vote against the deal.

General Motors Corp. slumped $1.69 to $48.65, dragging on the Dow. Italian carmaker Fiat is issuing $2.2 billion in bonds exchangeable into its holding of GM shares.

Aramark Worldwide Corp., one of the world's largest food service companies, finished the session up $2.40 to $25.40 in its Wall Street debut. This week marks the busiest week of the year for new issues.

Advancing issues and declining issues traded nearly evenly on the New York Stock Exchange. Volume came to 1.36 billion shares, compared with 1.18 billion at the same point Monday.

The Russell 2000 index gained 0.58 to 474.76.

Overseas, Japan's Nikkei stock average slipped 0.9 percent. In Europe, Germany's DAX index gained 0.4 percent, Britain's FT-SE 100 fell 0.5 percent, and France's CAC-40 lost 0.1 percent.

Reuters and the Associated Press contributed to this report.