U.S. Stocks Decline Ahead of Federal Reserve's Rate Decision

By Eric Martin

Oct. 29 (Bloomberg) -- U.S. stocks retreated as a report on durable-goods orders heightened expectations that an interest- rate cut by the Federal Reserve won't be enough to rescue the economy.

Home Depot Inc., Intel Corp. and Citigroup Inc. lost more than 2 percent to help lead declines in the Dow Jones Industrial Average a day after its second-best point gain. Schlumberger Ltd., the world's largest oilfield-services company, and Exxon Mobil Corp. increased on prospects that lower borrowing costs will stoke demand for energy.

The Standard & Poor's 500 Index decreased 8.78 points, or 0.9 percent, to 931.73 at 9:55 a.m. in New York. The Dow slipped 42.61 points, or 0.5 percent, to 9,022.51 a day after jumping 889 points. The Nasdaq Composite Index lost 15.17, or 0.9 percent, to 1,634.3.

``There are still significant downside risks to equity markets and credit markets,'' New York University professor Nouriel Roubini said in an interview with Bloomberg Television. ``We are at the beginning of a very severe U.S. recession. It's going to be much more painful.''

Roubini, who predicted the current financial crisis in 2006, said the S&P 500 may fall as much as 30 percent more as the economy slows during a two-year contraction. The Fed will probably cut its interest-rate target close to zero during that time, he said.

Europe, Asia Gain

Stocks gained in Europe and Asia for a second day as falling credit costs spurred a rally in financial shares, while higher commodity prices pushed up oil and metals producers.

U.S. stock-index futures reversed earlier gains before the open of U.S. exchanges after the Commerce Department said orders for U.S. durable goods excluding transportation equipment fell in September for a second month as the credit freeze deepened and sales declined. The 1.1 percent drop in bookings of goods meant to last followed a revised 4.1 percent decrease in August that was larger than previously reported.

Earlier gains in U.S. futures were spurred by a 13th straight drop in three-month dollar borrowing costs. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars dropped 5 basis points to 3.42 percent, according to the British Bankers' Association.

The Federal Reserve is scheduled to announce its decision on borrowing costs at about 2:15 p.m. in Washington. The median forecast of economists surveyed by Bloomberg News forecast a reduction by half a percentage point to 1 percent.

Fed Bets

Fed-funds futures suggests traders are betting on 50 percent odds that policy makers will cut the target for overnight lending by 0.75 percentage point. Those trades are no longer providing the most accurate signal of where the Fed will take borrowing costs since traders are looking at the rates banks charge each other for overnight loans when figuring out their bets on what the central bank will do. For the last six weeks the Fed has failed to get those overnight rates to line up with its target.

The Fed has already cut the benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system.

Advance figures on gross domestic product, due from the Commerce Department tomorrow, may show the economy contracted at a 0.5 percent annual rate from July through September, according to a Bloomberg survey. It would be the second drop in a year and the biggest since the 2001 recession.

Yesterday's Rally

Stocks soared yesterday with the Dow average posting its second-best point gain as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing. The S&P 500 jumped 11 percent yesterday, trimming its monthly decline to less than 20 percent and its yearly loss to 36 percent.

Equities around the world tumbled have this month, wiping out more than $12 trillion of market value before today, after money markets froze, banks' credit losses climbed to $680 billion and economic growth weakened.

Companies in the S&P 500 that reported third-quarter earnings so far posted a 17 percent decline on average, according to Bloomberg data. A profit drop for the entire index would mark the fifth straight quarterly slide, the longest stretch since the burst of the dot-com bubble at the start of this decade.

Investors speculating on a rebound in U.S. stocks may have a better chance in the first year of a Barack Obama presidency than a John McCain administration, if election history is any guide.

Since 1900, the Dow Jones Industrial Average rose 9.8 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of seven Democrats from Woodrow Wilson to Bill Clinton. Among newly elected Republicans, five -- including Herbert Hoover, Richard Nixon and George W. Bush -- preceded stock-market declines, with a median retreat of 2.5 percent for all 10, data compiled by Bloomberg show.

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To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net;