The Nasdaq swung to its lowest close of the year. Crude climbed near $72, while metals prices recovered
Stocks finished lower Tuesday, after a rebound attempt on rising energy and commodity prices slipped away in the closing hour. The recent shift out of speculative markets and into the safety of Treasuries reversed, supporting early gains, but late selling probably reflected underlying concerns about inflation and rising interest rates, says Standard & Poor's Equity Research.
The Dow Jones industrial average slipped 26.98 points, or 0.24%, to 11,098.35, trailed by Home Depot (HD ). The broader Standard & Poor's 500 index fell 5.5 points, or 0.44%, to 1,256.57. The tech-heavy Nasdaq composite dropped 14.09 points, or 0.65%, to 2,158.76, its lowest closing level since Nov. 2, 2005.
Growth fears, not inflation fears, are the cause of recent weakness, some analysts say. "I have long thought that the second half of this year would see a sell-off in risky assets and a rally in bonds," writes Joachim Fels, chief global fixed income economist at Morgan Stanley. "To me, it looks as if the second half of the year has started early."
Others say the Federal Reserve's inflation-fighting efforts are unlikely to damage growth. "Fear the Fed will have to trample on the economy to crush inflation has unleashed a significant risk reduction trade in global financial markets, with a noticeable bull-flattening rally in Treasuries," writes Richard Berner, chief U.S. economist at Morgan Stanley. "In our view, the Fed has more work to do, and we're mildly bearish on bonds."
Meanwhile, another economist says growth has shown no definitive signs of slowing yet. "We continue to believe that U.S. growth will slow and interest rates will decline in the second half of 2006," writes Jan Hatzius, chief economist at Goldman Sachs. "However, we have not yet seen a 'smoking gun' that would confirm the transition to slower growth."
Investors were assessing a bounce in commodities futures Tuesday. Higher metals prices boosted companies like Newmont Mining (NEM ) and Phelps Dodge (PD ), which were among Monday's losers. Aluminum giant Alcoa (AA ) shared in the gains most of the day, but eventually finished lower.
In earnings news, Toll Brothers (TOL) was higher after posting 3% higher profit for its fiscal second quarter. The luxury home builder also trimmed its guidance for fiscal 2006.
Meanwhile, Fannie Mae (FNM) was higher after the mortgage lender said it would implement corrective measures and pay a $400 million penalty as part of settlements with federal regulators.
Internet search giant Google (GOOG ) was higher after launching distribution of video-enabled advertisements through its content partners.
Networking equipment maker Juniper Networks (JNPR) was lower on news the government requested 10 years of information from the company as part of a probe into executive stock-option grants.
Elsewhere, XM Satellite Radio (XMSR ) was lower after terminating a deal to buy WCS Wireless, which owns wireless spectrum licenses. Separately, Ladenburg Thalmann upgraded the stock from hold to buy.
In broker calls, handheld-device maker Palm (PALM ) was sharply lower after Bear Stearns downgraded the stock from peer perform to underperform after Motorola (MOT ) launched a rival smartphone.
On the economic front, the International Council of Shopping Centers (ICSC) and UBS Securities weekly chain stores sales index fell 0.8% for the week ended May 20. Investors were looking ahead to Wednesday's reports on durable goods orders and new home sales for April. A second reading on first-quarter gross domestic product (GDP) and April figures for existing home sales are set to follow Thursday, while a report on personal savings, consumption and income will be in focus Friday.
In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed up $1.80 at $71.76 a barrel, ahead of weekly inventory data Wednesday.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rebounded 146 points, or 2.64%, to 5,678.7. Germany's DAX index bounced 132.25 points, or 2.38%, to 5,678.49. In Paris, the CAC 40 index climbed 118.03 points, or 2.45%, to 4,931.53.
Asian markets finished lower. Japan's Nikkei 225 index sank 258.67 points, or 1.63%, to 15,599.2. In Hong Kong, the Hang Seng index slipped 59.04 points, or 0.37%, to 15,864.56. Korea's Kospi index retreated 8.73 points, or 0.65%, to 1,329.86.
Treasuries declined Tuesday after rallying during stocks' weakness the previous session. Prices for 10-year Treasury notes dropped to 100-14/32 with a yield of 5.07%, while 30-year bonds fell to 90-03/32 for a yield of 5.15%.