Stocks Drop on Inflation Fears
Stocks fell sharply in active trading Tuesday on concerns that the Federal Reserve is increasingly worried about inflation, and will continue to raise interest rates.
Shares of lenders and home builders led the decline. Energy stocks also tumbled as crude oil prices slid.
The Dow Jones industrial average slumped 94.37 points, or 0.9%, to 10,441.11.
The market held up well for most of the session, then pulled back in the final two hours, after Dallas Federal Reserve Bank President Richard Fisher said inflation was nearing the high end of the Fed’s comfort zone -- a signal that the Fed would keep raising interest rates, analysts said.
Other Fed officials also have warned in recent weeks that the central bank saw no reason to halt its credit-tightening campaign, which has lifted short-term rates to four-year highs.
“Inflation has been on a slight upward tilt the past couple of years,” Fisher said in the text of a speech given in Dallas. “We now face higher energy prices and businesses’ desire to pass the increased costs on to their customers.”
Reinforcing that idea, Clorox on Tuesday cut its earnings estimate for the current fiscal year, citing energy costs. The household-products maker also said it would raise prices on about 40% of its products to offset raw materials prices.
Clorox shares, already trading near their lowest level in a year, fell 77 cents to $53.81.
Also, Procter & Gamble was downgraded to “hold” from “buy” at the brokerage arm of Citigroup because of concerns over higher raw materials costs, including energy. P&G; lost $1.23 to $58.08.
In the broader market, the Standard & Poor’s 500 index fell 12.23 points, or 1%, to 1,214.47, and the Nasdaq composite gave up 16.07 points, or 0.8%, to 2,139.36.
Losers topped winners by about 2 to 1 on the New York Stock Exchange.
There was mixed news from the energy sector. Crude oil futures in New York dropped $1.57 to $63.90 a barrel, the lowest since Sept. 16. But natural gas futures set a record high.
The Treasury bond market showed little reaction to Fisher’s comments, but traders noted that yields had surged in recent weeks as economic data had pointed to resilient business activity and growing inflation pressures.
The 10-year T-note yield ended at 4.37%, down from 4.39% on Monday.
The 2-year T-note yield was flat at 4.21%, a four-year high and up from 3.73% on Sept. 1.
The stock market’s next big test may be third-quarter earnings reports, which will begin to roll out next week. Despite the surge in oil and natural gas prices after Hurricane Katrina, analysts still expect strong profit gains from many companies.
Excluding energy firms, earnings for the S&P; 500 companies are expected to be up 11% from a year earlier, according to data tracker Thomson Financial.
Among the day’s market highlights:
* Home builders sliding on interest rate worries included Toll Bros., down $2.25 to $41.40; Ryland Group, off $3.30 to $66.05; and KB Home, which fell $2.85 to $70.41.
Among lenders, Countrywide Financial fell 50 cents to $31.70, Impac Mortgage lost 35 cents to $12.03 and Golden West was down 97 cents to $58.39.
* Energy stocks were broadly lower, hurt in part by BP’s warning that third-quarter profit would be clipped because of hurricane damage to gulf facilities.
BP slid $1.80 to $68.80, ConocoPhillips dropped $2.56 to $66.40 and Occidental Petroleum fell $3.98 to $81.42.
* A gauge of healthcare shares advanced 0.5% for the only gain among 10 industry groups in the S&P; 500. Abbott Laboratories led the rally after the company won regulatory approval to expand use of its Humira drug for early treatment of rheumatoid arthritis, a joint-destroying disease. Abbott added $1.53 to $44.01.
* Lexmark International tumbled 29%, or $17.44, to $43.50 after an unexpected drop in revenue prompted the printer maker to cut its third-quarter profit estimates in half. Lexmark also said fourth-quarter profit could be lower than expected.
