updated 2/22/2006 7:03:29 AM ET 2006-02-22T12:03:29

Stocks sank Tuesday after a robust reading on the economy, minutes from the most recent meeting of the Federal Reserve and the continuation of a solid earnings season cemented the feeling on the Street that additional rate hikes are a near certainty.

Major Market Indices

The sell-off, which followed a higher opening, began after the Conference Board said its Index of Leading Economic Indicators , a closely watched gauge of future economic activity, rose sharply in January. The index is designed to take the pulse of the economy in the near term. It rose 1.1 percent in January, following a 0.3 percent increase in December.

The economic indicator reading was almost twice as high as economists expected, providing one more sign that “there’s growth still there in the economy and the Fed’s going to have to do its magic by continuing to raise interest rates,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group.

Minutes from the most recent meeting of Fed policymakers underscored the point, with Fed governors saying further rate hikes might be needed to keep “continuing upside risks” to inflation in check.

Strong results from Federated Department Stores Inc. and The Home Depot Inc. couldn’t distract the market from its interest rate worries and less stellar results from Wal-Mart Stores Inc., the world’s largest retailer, further dimmed the mood on the Street.

The Dow Jones industrial average finished the session down 46 points, or 0.4 percent, while the broader Standard & Poor’s 500-stock index declined 4 points, or 0.3 percent. The technology-rich Nasdaq composite index fell 20 points, or 0.9 percent. The U.S. financial markets were closed Monday for President’s Day.

Bonds were lower, with the yield on the 10-year Treasury note at 4.56 percent, up from 4.54 percent late Friday. U.S. markets were closed Monday for Presidents’ Day. The U.S. dollar was mixed against other major currencies in European trading. Crude oil futures climbed following militant attacks on oil pipelines located in Nigeria.

In recent weeks, investors are again mulling over their chronic worry: Will the Fed raise interest rates so high that the economy will plunge into recession?

There’s little to make the Fed stop. Fourth-quarter earnings season is more than 85 percent complete and the Standard & Poor’s 500 is on track to beat analysts’ estimates for its total returns, according to JP Morgan Chase & Co. Earnings-per-share growth is close to 14 percent, the 15th straight quarter of double-digit earnings growth.

“Two months ago, a hike in May seemed not so likely; now it seems like a certainty,” said Neil Massa, equity trader at John Hancock Funds.

In company news, Federated fell $1.32 to $70.31 after its fourth-quarter net income rose 59 percent from last year, aided by the acquisition of former rival May Department Stores Co. The stock had risen 77 cents in opening trading. The department store operator also backed its full-year financial forecast. Stripping away results from the May acquisition, the company still beat analysts’ forecasts.

Home Depot, the nation’s largest home improvement store chain, rose 3 cents to $41.89 after it reported a more than 23 percent jump in fourth-quarter profit on a solid increase in sales. Same-store sales — a measure that compares sales at stores open at least a year — rose 5.5 percent in the fourth quarter. The results beat Wall Street expectations.

Wal-Mart fell 57 cents to $45.53 after its fourth-quarter revenue fell short of Wall Street projections , and it also forecast profits below analysts’ estimates. The company’s earnings rose 13.4 percent after aggressive holiday advertising helped boost sales by 8.6 percent.

RadioShack Corp. fell 13 cents to $18.95 after the company’s board said Monday it had accepted David J. Edmondson’s resignation as president and CEO. The board promoted Claire Babrowski, the company’s executive vice president and chief operating officer, to acting CEO. Edmondson, who is also facing a trial for driving while intoxicated, said he had two college degrees for which the school he attended has no records. The company’s stock dipped to a three-year low Friday after it announced its fourth-quarter results. Banc of America raised the stock to “neutral” from “sell” on the news.

Overseas, Japan’s Nikkei stock average rose 2.96 percent. In Europe, Britain’s FTSE 100 was down 0.09 percent, Germany’s DAX index was up 0.12 percent and France’s CAC-40 was up 0.24 percent.

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