Wall Street off to worst New Year start in 25 years

US blue-chip stocks suffered their worst start to a new year in 25 years on Wednesday 2 December, after an index of manufacturing fell sharply, raising fears that the US economy is slowing more than expected.

The Institute for Supply Management (ISM) survey showed that manufacturing was unexpectedly weak in December. The ISM index fell 3.1 percentage points to 47.7 last month, against expectations it would be little changed. In index of 50 is the line between growth and contraction.

Energy stocks were the lone bright spot in a sea of red as crude oil prices touched $100 a barrel. But the hike in crude battered a broad range of transport and industrial companies.

The Dow Jones Industrial Average fell 1.7 per cent to 13,043.96 points, its worst percentage decline on the first trading day of a year since 1983. The S&P 500 closed 1.4 per cent lower at 1,447.16 and the Nasdaq Composite shed 1.6 per cent to 2,609.63.

Analysts say there is little the US Federal Reserve can do, caught as it is between a rock and a hard place, trying to fight inflation at the same time as dealing with the slowdown in US growth.

The minutes of the Fed's open market committee's December meeting emphasised the difficulty of "unusually uncertain" economic conditions and indicated the Fed remained "exceptionally alert" to the possible need for further rate cuts. The futures market has fully priced in a 25 basis point cut at the end of this month, compared with a 68 per cent chance just a week ago.

Technology stocks were particularly weak after Banc of America Securities (BofA) downgraded eight companies - three of them to 'sell' - saying a cyclical recovery had run its course, while inventories had risen above equilibrium levels.

In the chip sector, BofA analyst Sumit Dhanda cut Intel to 'neutral' and told investors to sell shares in Advanced Micro Devices (AMD). The PHLX semiconductor sector index lost 2.9 per cent to 396.34.

Qualcomm fell 2.4 per cent to $38.39 after it said it expected an "immediate short-term impact" from a court ruling that it must halt chip sales that infringe patents belonging to Broadcom, which gained 1.5 per cent to $26.52.

Amazon outperformed after Citigroup told investors to buy the shares citing expectations of strong revenue growth and margin expansion. The shares gained 3.9 per cent to $96.25.

Transport groups struggled as oil prices soared and after JP Morgan downgraded FedEx from 'overweight' to 'neutral' because of weak freight demand and high fuel costs. FedEx shares fell 3.9 per cent to $86.16.

Trucking company YRC Worldwide fell a staggering 9.7 per cent to $15.43, after it warned that it expected to incur charges in the fourth quarter related to previous acquisitions. Goodyear Tire & Rubber fell 5 per cent to $26.82 after Goldman Sachs said that cost inflation was acting as a large offset to cost savings activity.

Restaurant chains were down after Bear Stearns downgraded the sector to 'underweight'. Analyst Joseph Buckley cut Starbucks to 'peer perform' from 'outperform', because he expects less affluent consumers will start to feel the pinch of high coffee prices. The stock fell 5.7 per cent to $19.31.

Manufacturing shares declined after the ISM report and as Citi downgraded industrial conglomerate Textron to "hold" from "buy", its shares fell 6.3 per cent to $66.81. Financials, too, fell sharply after National City announced it would slash its dividend by almost 50 per cent and planned to raise more capital to cope with credit market turmoil. The S&P investment bank index shed 3.5 per cent with Morgan Stanley, down 4.1 per cent at $50.95 and Lehman Brothers 5 per cent lower at $62.19.

But as oil prices rose, energy stocks benefited. Transocean, the world's largest offshore drilling company gained 2 per cent to $145.95. Fears of recession also bolstered gold. Newmont Mining, the world's second largest gold producer, rose 7.3 per cent to $52.39. It was the best performer on the S&P, as gold prices surged to a record high.

(Also see: Fed minutes say credit woes may result in more rate cuts)