Fed chief’s talk stalls stocks
Stocks skidded lower Tuesday after comments by Federal Reserve Chairman Ben S. Bernanke and a strong reading on the service sector suggested the central bank had little reason to lower interest rates.
Bernanke’s speech by satellite to an international monetary conference in South Africa spurred investors to sell a day after the Dow Jones industrial average and the Standard & Poor’s 500 index edged up to new highs. Bernanke said the economy would recover from its recent feeble performance despite a housing slump that he said could be a drag on the economy for longer than anticipated.
His forecast for rebounding growth, as well as his assessment that inflation was ebbing but still “somewhat elevated,” made it appear unlikely the Fed would lower rates anytime soon, disappointing Wall Street.
Behind the stock market’s recent surge, driven mainly by strong takeover activity, has been a backdrop of stable interest rates and the possibility of a rate cut. But investors increasingly fear the Fed may alter that climate.
“The market is hoping for slow growth and moderate inflation, and now there’s concern they might have to bump up rates in the second half of the year,” said Jim Herrick, director of equity trading at Baird & Co.
In one of the few key economic reports due this week, the Institute for Supply Management’s nonmanufacturing index came in at 59.7 in May, higher than expected and up from April’s reading of 56. A reading above 50 indicates expansion in the service sector, a diverse group of industries that represents about 80% of U.S. economic activity.
The institute’s report hurt stock prices because although equity investors want to see growth, they worry that if it’s too robust, it could prompt a rate hike.
The Dow tumbled 80.86 points, or 0.6%, to 13,595.46 after being down more than 100 points early in the session. The Standard & Poor’s 500 index fell 8.23 points, or 0.5%, to 1,530.95.
Before Tuesday’s decline, the Dow and the S&P; 500 were up more than 8% since the beginning of the year.
The Nasdaq composite index shed 7.06 points, or 0.3%, to 2,611.23. The Russell 2000 index of smaller companies fell 6.84 points, or 0.8%, to 848.25.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange.
Bond yields surged after Bernanke’s comments and the strong service sector data.
The yield on the benchmark 10-year Treasury note rose to 4.99% from 4.93% late Monday. The 10-year yield is trading at 9-month highs, and appears poised to break through 5%, a level not reached since August 2006.
The dollar fell against other major currencies, while gold prices edged lower.
Crude oil futures fell 60 cents to $65.61 a barrel on the New York Mercantile Exchange.
In other market highlights:
* Guess shares surged $2.88, or 6.1%, to $50.30 in after-hours trading after the Los Angeles-based apparel company reported better-than-expected earnings. In regular trading, the company’s stock rose 17 cents to a record close of $47.42.
* TD Ameritrade jumped 9.3% to $21.81 in late trading after hedge funds holding 8.3% of its shares said the online brokerage should pursue a combination with E-Trade Financial or Charles Schwab.
* Telecom company Avaya rose 31 cents to $17.03 after announcing late Monday an agreement to be acquired for $8.2 billion by private equity firms Silver Lake and TPG Capital.
* Retail stocks took a hit after home goods seller Bed Bath & Beyond warned late Monday that earnings might fall below analyst estimates. The stock lost $2.20, or 5.4%, to $38.27.
* The biggest decliner among the 30 Dow component companies was DuPont after it was downgraded by Lehman Bros. The chemical giant’s shares fell 95 cents, or 1.8%, to $52.24.
* Google jumped $11.77, or 2.3%, to an all-time high of $518.84. The company agreed with Salesforce.com to cooperate on online advertising. Salesforce rose 40 cents to $47.46.
* U.S. shares of Ryanair Holdings fell $1.69, or 4.2%, to $38.66 after the Irish airline issued a cautious forecast for 2007.
* Overseas, China’s benchmark stock index rebounded 2.6% on Tuesday after plummeting 8.3% on Monday. Elsewhere, key indexes rose 0.45% in Japan and fell 0.5% in Britain, 0.7% in Germany and 0.8% in France.
