NEW YORK — Media stocks sank with the broader market Tuesday as Federal Reserve chief Alan Greenspan’s half-point interest rate cut sure didn’t cut it with investors.
Viacom fell 4.6% to $44.70, Walt Disney was down 3.9% to $26.91, AOL Time Warner was off 2% to $39.09 and News Corp. fell 2.4% to $32.31 — even though the central bank has now lowered interest rates three times so far this year.
The problem is that all three were half-point reductions. This time around, investors were looking for relief to the tune of a three-quarters of a point cut to give the rocky stock market a real breather.
Precisely what the Federal Reserve did is ratchet down its so-called federal funds rate, a bellwether rate charged for overnight lending between banks, by 50-basis points to 5% from 5.50%. Banks follow the Fed and lower their own interest rates. That makes it easier to borrow, which encourages consumers to spend, and corporate America, including media companies, to move ahead with big-ticket projects.
Ready to act
The Fed implied it’s ready to cut rates again if necessary to keep a decade-long economic expansion from completely stalling out. Some on Wall Street expect it will do just that — even before its next regularly scheduled meeting eight weeks from now.
But on Tuesday, the market, which has been pummeled by corporate profit warnings for weeks, was clearly frustrated. The Dow Jones Industrial Average hit a new 52-week low, dropping 4.2%, or 238 points, to close at 9,720 — well under the 10,000 mark it hit last year with much fanfare. The Nasdaq plunged 4.8% to 1,857, below its key 2,000 benchmark.
The downturn followed several tumultuous trading days last week, with steep drops in the market before the Fed’s move. Entertainment stocks took more than their share of knocks. As the economy slows and profits wane, the advertising market follows it down, and that’s particularly bad news for media companies.
Analysts, with the thankless job of stock-picking on a roller coaster, still recommend the bigger showbiz players with diversified assets as opposed to pure-play, single-source revenue businesses like TV station groups.
“(But) if the recent spate of profit warnings and layoffs in tech land proliferate to other sectors in the market, all bets are off,” cautioned UBS Warburg’s Chris Dixon. “We believe a negative overall market psychology may put increased pressure on advertising spending through the summer, making it increasingly difficult for media companies to meet cash flow expectations.”