Rally Falters Despite Rate Cut

The Federal Reserve gave investors exactly what they wanted on Wednesday: another half-point interest rate cut on top of last week’s three-quarter-point emergency rate cut, but stocks nonetheless ended the day with modest losses on concern about possible credit rating downgrades of bond insurers.

The major indexes jumped more than 1% following the Fed’s announcement, then gave all the gains back in the final hour of trading on worries that lower credit ratings for bond insurers could lead to another round of credit market troubles.

Early in the day, the U.S. government reported that the economy grew just 0.6% in the fourth quarter thanks to falling inventories, half of what economists had expected, and inflation pressures inched up. The news raises the odds that the economy could contract in the first quarter; a recession is commonly defined as two or more consecutive quarters of negative GDP. Equipment and software spending rose 3.8% in the fourth quarter, down from the third quarter’s 6.2% percent increase.

After the close, Amazon.com showed that it is faring well despite the economic downturn. Its quarterly sales were up 42% to $5.67 billion, $300 million better than expected, and the company raised sales guidance too. But in-line earnings of 48 cents a share had investors worried once again about margins at the online retailer, and shares fell 4% in after-hours trading.

Yahoo was a big decliner during the regular trading session, falling 8.5% on a lukewarm outlook.

Flextronics, Websense, Unisys, Silicon Labs and CyberSource posted strong gains on their earnings reports, while Hutchinson, Cymer, Foundry and Clearwire tumbled on their results.

E*Trade gained 10% on reports of insider buying.

Google slipped ahead of its results due out after the close on Thursday. Expectations are for a 55% sales gain to $3.45 billion and earnings of $4.45 a share.

The Nasdaq lost 9 to 2349, the S&P shed 6 to 1355, and the Dow fell 37 to 12,442. Volume rose to 4.72 billion shares on the NYSE, and 2.63 billion on the Nasdaq. Decliners led by a 19-14 margin on the NYSE, and 17-13 on the Nasdaq. Downside volume was 63% on the NYSE, and 56% on the Nasdaq. New highs-new lows were 29-74 on the NYSE, and 39-123 on the Nasdaq.

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