Stocks Fall Broadly for Second Day

By Tom Petruno

May 13, 2006 12 AM PT

Times Staff Writer

Stocks slumped for a second straight session Friday as fear of inflation and higher interest rates sent some investors streaming for the exits.

The sell-off slammed share prices worldwide, raising the prospect of at least a short-term halt to what has been a spectacular global rally in stocks since October. Many market indexes have hit record or multi-year highs this month.

The Dow Jones industrial average tumbled 119.74 points, or 1%, to 11,380.99, after sliding 1.2% on Thursday.

Broader indexes suffered steeper losses than the Dow on Friday, but their declines also were less severe than in Thursday’s session. The technology-dominated Nasdaq composite fell 28.92 points, or 1.3%, to a three-month low, after diving 2.1% the previous day.

Investors’ mood has soured this week amid worries that inflation pressures in the global economy could drive interest rates significantly higher.

Those concerns have been stoked in recent weeks by a fresh surge in the prices of oil, gold and other commodities, and by a plunge in the dollar’s value. A sinking dollar can boost the prices of imported goods.

On Friday, markets crumpled after the government said a gauge of import prices jumped 2.1% in April, the most in seven months.

Even though import prices excluding oil were flat for the month, bond investors weren’t appeased: A selling wave in the Treasury bond market drove the yield on the benchmark 10-year T-note to 5.20%, up from 5.13% on Thursday and the highest since May 2002. Bonds’ yields rise as the securities’ prices fall.

The surge in yields weighed on the stock market, as did another drop in the dollar.

“People are very much concerned about the inflation outlook,” said Drew Matus, an economist at Lehman Bros. “The market is not willing to give anyone the benefit of the doubt right now.”

Rising inflation erodes the value of financial assets. Upward pressure on inflation also would complicate policy for the Federal Reserve, which many investors had figured was near the end of the credit-tightening program it began in mid-2004.

The Fed on Wednesday raised its benchmark short-term rate to 5% from 4.75%. Although the hike was expected, the central bank disappointed some investors by indicating that it wasn’t sure what its next move on rates would be.

Some investors have hoped that the Fed would take a pause in its credit-tightening campaign this summer. Now, with long-term bond yields soaring and the dollar declining, many analysts say the Fed could be forced to continue raising rates to stem investors’ worries about inflation.

Peter Boockvar, market strategist at Miller, Tabak & Co. in New York, said bond investors were looking for the Fed, under new Chairman Ben S. Bernanke, to show that it won’t allow inflation pressures to build. That could require tighter credit that would slow the economy.

“If the bond market isn’t happy [with the Fed] they’re going to take over and tighten for it” by pushing long-term yields higher, he said.

U.S. inflation has been on the rise over the last year. The consumer price index was up 3.4% in the 12 months through March. The core index, excluding energy and food costs, was up 2.1%.

Markets will be bracing next week for the government’s reports on April inflation. The wholesale prices report will be released Tuesday, followed by consumer prices Wednesday.

Wall Street’s turmoil this week, particularly the sinking dollar, has raised the prospect that foreign investors might lead an exodus from U.S. stocks and bonds. The nation has been heavily dependent on foreign capital to fund its trade and budget deficits in recent years.

As the dollar falls it erodes the value of foreigners’ U.S. investments, which could make them reluctant to hold on.

The dollar slid to 110.03 yen on Friday, down from 110.48 on Thursday and the lowest since September. The euro jumped to a one-year high of $1.291 from $1.284.

Six weeks ago the dollar was worth 118 yen and the euro was worth $1.21.

For the stock market, the mood was further dimmed Friday by a report that U.S. consumer confidence fell this month to the lowest level since October, in apparent reaction to soaring gasoline prices. That could jeopardize the outlook for consumer spending, analysts said.

Yet Wall Street bulls cautioned against becoming too gloomy. Many said stocks were overdue for a pullback after rallying since October with few pauses, and that inflation worries were a convenient excuse to cash in some gains.

“I think the bears are entitled to have one or two good days a year,” quipped Edward Yardeni, investment strategist at Oak Associates in Akron, Ohio.

He said he remained optimistic about the global economy, but added that, “Even the bulls are twitchy here. They’re pinching themselves because so much money has been made” in stocks in recent years.

The U.S. market has gone more than three years without a typical “correction,” meaning a short-term pullback of 10% to 15% in major indexes.

Among Friday’s highlights:

* The Standard & Poor’s 500 index slid 14.68 points, or 1.1%, to 1,291.24. Losers topped winners by about 4 to 1 on the New York Stock Exchange.

For the week, the S&P; lost 2.6%, the Dow fell 1.7% and the Nasdaq index slumped 4.2%.

* Small-company stocks, which have led the market for six years, were hit hard for a second day. The Russell 2,000 index lost 2% after falling 2.4% Thursday.

* Prices of key commodities declined after rocketing in recent weeks. Crude oil futures slid $1.28 to $72.04 a barrel. Gold pulled back from 25-year highs, falling $9.50 to $710.30 an ounce.

With the declines in commodity prices, the day’s stock sell-off was led by issues tied to that sector -- including energy companies and miners. Railroads, which have benefited from hauling raw materials, also slid.

Exxon Mobil dropped $1.22 to $62.24, miner Rio Tinto slumped $6.95 to $238.03 and rail giant CSX was down $2.40 to $70.72.

(BEGIN TEXT OF INFOBOX)

Global sell-off

Stock markets slumped worldwide Friday, but many still are up sharply year to date.

Pctg. change:

Country/index: U.S./Dow 30

Fri.: -1.0%

YTD: +6.2%

Country/index: U.S./S&P; 500

Fri.: -1.1%

YTD: +3.4%

Country/index: India/Sensex