msnbc.com news services
updated 6/12/2006 8:45:37 AM ET 2006-06-12T12:45:37

Wall Street finished its worst week in more than a year with another decline Friday, as persistent unease over inflation and the direction of interest rates kept investors nervous about buying into the stock market.

Major Market Indices

Stocks had appeared to steady through the morning session following several days of heavy declines driven by worries that higher interest rates will hurt the global economy. A jump in import prices and increased demand for foreign-made products renewed the market’s inflation jitters and sent stocks sliding again in afternoon trading. The broad market, as measured by the Standard & Poor's 500, finished at its lowest level of the year.

“There’s nervousness and uncertainty in the marketplace about direction of interest rates and [economic] growth,” said Scott Lynch, managing director of U.S. trading at CSFB in New York. “When there’s uncertainty, it’s not good for equities,” he added.

Friday’s decline capped a turbulent week for stocks, which have been losing value around the world on concerns about inflation and higher interest rates. More trouble could be on the way next week, when reports on wholesale and consumer-level inflation are due for release, on Tuesday and Wednesday.

While the Fed has been fixated on accelerating inflation, recent signs of economic weakness have investors fretting that the Fed might lift rates too high and derail the economy, said Jack Caffrey, equities strategist for JPMorgan Private Bank.

“People will be thinking about what the Fed will be debating at their June 28-29 meeting,” Caffrey said. “Investors are scared not necessarily about what the Fed will say, but of the possibility that the Fed may overtighten rates.”

Since the Federal Reserve said in early May that more rate hikes could be needed to counter inflation, investors have been increasingly unwilling to place bets and bid stocks higher, worried about a corresponding decline in the market.

The Dow Jones industrial average has shed 751 points since reaching a six-year high of 11,642.98 on May 10 and this week broke below the key psychological level of 11,000 for the first time in three months.

The pullback has been exacerbated by traders repositioning their holdings to account for the risk of rising interest rates and slowing economic growth, analysts say. But while stocks have slumped, investors seem unsure about where to put their money.

“I think we still have to push the risky asset values lower relative to safe assets because there’s been so much speculation that needs to be unwound,” said Jack Ablin, chief investment officer of Harris Private Bank. He said Friday’s afternoon retreat was an ominous sign of more losses in coming sessions.

The Dow closed with a loss of 46.90 points, or 0.43 percent, Friday, having risen as much as 37 points earlier in the session. The broader Standard & Poor’s 500-stock index and Nasdaq composite index each shed about 0.5 percent.

For the week, the Dow fell 3.2 percent, its worst weekly result since April 2005. The S&P 500 declined 2.8 percent and the Nasdaq composite tumbled 3.8 percent.

NYSE final consolidated volume of 3.31 billion shares trailed the 3.7 billion shares that changed hands Thursday.

Bonds prices drifted, with the yield on the 10-year Treasury note slipping to 4.98 percent from 5 percent late Thursday. Short-term yields continued lingering above long-term rates, signaling greater expectations of slowing economic growth.

Elsewhere, the U.S. dollar dipped against the Japanese yen and was flat vs. European currencies, while gold prices stood near $610 an ounce. Crude oil futures gained amid political unrest in Iraq following the death of the country’s main terrorist leader.

In corporate news, shares of General Motors rose in late trading following an announcement that its bankrupt former auto parts unit Delphi Corp. has reached an agreement with the United Auto Workers to offer buyouts to workers.

Texas Instruments raised its earnings and revenue targets for the second quarter, but attributed the gains to a legal settlement and a tax break.

Dow Jones industrial Coca-Cola saw its shares rise after Bear Stearns upgraded the beverage maker to “outperform” on gains from a weak dollar and improved results in some of its major foreign markets.

And the Dow got further support from Prudential Equity’s upgrade of Alcoa Inc. to “neutral,” citing an attractive stock price following a month-long pullback.

Friday’s economic news was dominated by the latest report on the nation’s trade gap , which the Commerce Department said had widened by $1.5 billion to $63.4 billion — below estimates of $65 billion — amid higher oil prices and a flood of furniture, computers and toys from China.

The Associated Press and Reuters contributed to this report.

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