Stocks sink on rate fears

Surging commodity prices raise specter of more Fed tightening

May 12, 2006|By WALTER HAMILTON | WALTER HAMILTON,LOS ANGELES TIMES

Wall Street suffered its biggest sell-off in nearly four months yesterday as rising oil and commodity prices stoked fears that inflationary pressure is building and that the Federal Reserve might continue to push up interest rates.

Only a day before, the Dow Jones industrial average had edged to within 80 points of a record close. But rising energy costs, lower-than-expected retail sales numbers and lingering concerns about the Fed's direction combined yesterday to send stocks broadly lower.

The Dow retreated 141.92 points, or 1.2 percent, to 11,500.73. The technology-laden Nasdaq composite index plummeted 48.04 points, or 2.1 percent, to 2,272.70, and the Standard & Poor's 500 index of blue-chip companies sank 16.93 points, or 1.3 percent, to 1,305.92.

Small-company stocks, which have spearheaded the market's rise in recent years, were thrashed; the Russell 2000 index tumbled 2.4 percent. Even stocks of oil and gold-related companies - which generally rise in tandem with prices of these commodities - fell with the rest of the market.

But yesterday, worries about overseas supplies sent crude futures racing past $73 a barrel, gold prices jumped to a fresh 25-year high and copper, nickel and zinc set records.

The Sun-Bloomberg index of the top stocks in Maryland gained 1.89 to 347.07. Declining issues led advancers by almost 4-to-1 on the New York Stock Exchange, as volume of 1.89 billion shares handily beat the 1.67 billion shares traded Wednesday.

Interest-rate concerns weighed on the dollar and bonds, with the yield on the 10-year Treasury note climbing to 5.15 percent from 5.12 percent late Wednesday. The dollar pulled back from earlier gains against the Japanese yen and was flat versus European currencies.

"This is probably a shakeout the market needed, but it's very broad-based," said Todd Clark, director of trading at Nollenberger Capital Management in San Francisco.

The sell-off appeared at least in part to be a delayed reaction to the Fed's meeting Wednesday. The Fed boosted its benchmark interest rate to 5 percent, as expected, but said further increases "may yet be needed."

Many investors had been looking for a sign that the Fed would take a pause after its latest increase. They believe the economy will cool on its own because of a decelerating housing market and rising gasoline prices, and that further rate increases could choke the economy and decapitate the bull market.

James Glassman, senior economist at JPMorgan Chase Securities in New York, said investors should take comfort in the Fed's vigilance about inflation. "I don't know what problem the market thinks there is," he said.

Glassman said the unease probably stems from the fact that new Fed Chairman Ben S. Bernanke is not telegraphing his intentions the way his predecessor, Alan Greenspan, would have done. But that's natural, given that Bernanke has his own style, Glassman said, and investors simply have to get used to it.

Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y., agreed. With another month of economic data still to come before its next meeting in June, the Fed is smart to keep its options open, he said.

"But that's no good for investors," Johnson acknowledged, "because they want to know what the Fed is going to do."

On Wall Street, AIG fell $3.39 to $63.15 after saying late Wednesday that its profit slid 16 percent last quarter despite solid results from its general insurance unit, even though revenue beat expectations.

Viacom posted a 9 percent drop in quarterly profit as it accumulated debt for acquisitions and buybacks. Viacom lost 76 cents to $38.86. J.C. Penney Co. sank 93 cents to $65.98 after cost-cutting measures boosted its profit by 22 percent. The department store chain also raised its full-year outlook, but the estimate was still below Wall Street views.

Overseas, Japan's Nikkei stock average lost 0.53 percent; Britain's FTSE 100 sank 0.68 percent; Germany's DAX index dropped 1.04 percent; and France's CAC-40 shed 0.29 percent.

Walter Hamilton writes for the Los Angeles Times. The Associated Press and Bloomberg News contributed to this article.

Stock of interest

Movie Gallery Inc.

Shares of the No. 2 U.S. video-rental chain surged $1.62 to $4.78 after it said its first-quarter profit more than doubled, helped by lower income taxes, and that it has enough cash for the rest of the year.

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