updated 2/25/2004 9:15:34 AM ET 2004-02-25T14:15:34

A sharp drop in consumer confidence gave investors another excuse to sell Tuesday, sending most stocks moderately lower in what some analysts are starting to call a market correction.

Major Market Indices

The worse-than-expected drop in the Conference Board’s consumer confidence index triggered the selloff. The index fell to 87.3 in February from 96.4 a month earlier; that reading was an 18-month high for the index. Wall Street analysts had expected the figure to come in at 92 or 93.

Combined with a fear of overly high stock prices and overall concerns about the pace of the economic recovery, Tuesday’s selling continued more than a week of down markets that could be the correction some analysts and investors have been expecting.

A correction is a reversal of the prevailing trend in the markets, which have been rising steadily since last spring. Economists see corrections as important parts of the overall market mechanism, keeping stock prices from becoming inflated.

“We haven’t had a meaningful correction since last March,” said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds. “In the near-term it’s painful, but it’s very, very healthy.”

The Dow Jones industrial average lost 43.25, or 0.4 percent, to 10,566.37, having fallen more than 80 points earlier in the session.

Broader stock indicators were narrowly lower. The Standard & Poor’s 500 index was down 1.90, or 0.2 percent, at 1,139.09. The tech-heavy Nasdaq composite index slipped 2.08, or 0.1 percent, to 2,005.44. The Nasdaq has nearly erased its 2004 gains over the past week.

Wall Street analysts had expected the consumer confidence measure to decline, but they were also hoping some components of the index would alleviate investors’ concerns. The larger-than-expected drop took many investors by surprise.

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The confidence figure is merely a symptom of larger overall concerns on the part of consumers and investors, according to Hugh Johnson, chief investment officer at First Albany Corp.

“The report sort of tells investors there are some reasons to worry about the economy and earnings, and therefore reasons to worry about valuation,” Johnson said.

Kelmon said the correction could be relatively short, with the major indexes back up to their recent highs next month. He added that first-quarter earnings, expected to be as good as those from the fourth quarter, will help fuel the rebound.

Federal Reserve Chairman Alan Greenspan testified on Capitol Hill on the state of federally funded mortgage companies, Fannie Mae and Freddie Mac, saying they could pose a threat to the country’s financial system if their debt is not restrained through greater regulation. Fannie Mae fell $2.65 to $76.25 and Freddie Mac shed $1.81 to $62.12.

Telecom stocks fell as Morgan Stanley downgraded them before the session began. Among the downgrades, Sprint Corp. fell 49 cents to $17.98, Nextel Communications shed 49 cents to $27.05, and AT&T Corp. gained 23 cents to $19.95. The investment house upgraded AT&T Wireless Services, which rose 7 cents to $13.65, and Verizon Communications, which climbed $1.08 to $38.09.

Comcast Corp. rose 31 cents to $29.82 after saying its $54 billion bid for The Walt Disney Co. was not properly considered by the Disney board. Disney was down 79 cents at $25.96.

Clear Channel Communications, owner of local radio and television stations, dropped 92 cents to $42.92 after posting earnings that were 2 cents short of analysts’ expectations.

Advancing issues barely outnumbered decliners on the New York Stock Exchange, where volume came to 1.52 billion shares, compared with 1.38 billion on Monday. On the Nasdaq market, decliners were ahead of advancers by a 6 to 5 ratio.

The Russell 2000 index of smaller companies was up 1.67, or 0.3 percent, at 571.87.

Overseas, Japan’s Nikkei stock average dropped 2.1 percent. In Europe, Britain’s FTSE 100 closed down 0.6 percent, France’s CAC-40 finished 1.3 percent lower and Germany’s DAX index tumbled 1.9 percent for the session.

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