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msnbc.com
updated 4/14/2004 8:13:07 AM ET 2004-04-14T12:13:07

Stocks fell sharply Tuesday, as unexpectedly strong economic data eclipsed some upbeat earnings reports and sparked fears that the Federal Reserve could tighten credit sooner than expected.

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“We’re down today because of the economic news,” remarked Peter Cardillo, chief markets strategist at New York retail brokerage S.W. Bach. “It’s really strong and it's paving the way for an increase in interest rates, and I think this will happen at the Fed’s policy meeting in the latter part of June.”

Before Tuesday’s open, U.S. stock futures surged after the Commerce Department reported a 1.8 percent increase in retail sales for March, the biggest jump in a year and far better than the 0.6 percent economists expected. Separately, the government said inventories at U.S. businesses posted their largest gain in more than three years in February, exceeding analysts’ expectations.

While the retail data helped the markets open higher, they quickly slipped into negative territory and edged lower throughout the session. By the close of trading, the Dow Jones industrial average was down 134.28 points, or 1.3 percent, at 10,381.28, while broader stock indices also slumped.

The Standard & Poor’s 500-stock index ended the day off 15.76 points, or 1.4 percent, at 1,129.44 and the tech-loaded Nasdaq composite index fell 35.40 points, or 1.7 percent, to 2,030.08.

The strikingly strong March retail sales report raised the specter of inflation and concerns that the U.S. Federal Reserve may raise short-term interest rates sooner than expected to cool a rapidly resurgent economy. The U.S. dollar posted sharp gains against other major currencies Tuesday, while Treasury prices dropped.

The selling in equities was broad, with every major stock sector losing ground, since rising interest rates could make borrowing difficult for most companies. Interest rate-sensitive stock sectors, like financial services and home builders, fell sharply. Citigroup, the world’s largest financial services firm, was one of the biggest drags on the Dow, its share price falling 1.7 percent to $51.20.

Some market strategists were baffled by Wall Street’s sudden concern about a looming rise in interest rates, arguing that it has been priced into the market for some time. Others, like Stuart Freeman at A.G. Edwards & Sons, said there’s still a chance the Fed might hold off on a rate hike until the end of the year.

“I think the Fed will want to see more than one really strong employment number and maybe a few more numbers like this retail figure before they move,” Freeman said, alluding to the 308,000 jobs created in March.

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A hike before year’s end could put President Bush’s re-election into question, according to Hugh Johnson, chief investment officer at First Albany Corp. The market is worried about the prospect of a Democratic administration, which might roll back the 15 percent tax rate on capital gains and dividends, he said.

“It’s a whole string of dominoes,” Johnson said. “If this weren’t an election year, you’d see earnings and economics outweigh the interest rate concerns.”

With earnings season under way, healthcare products maker Johnson & Johnson and investment firm Merrill Lynch & Co., two closely watched stocks, both surpassed Wall Street estimates in announcements before the start of trading. But the upbeat earnings reports were overshadowed by the interest rate worries, and may not have been impressive enough to move the market anyway.

“Investors want to be awed [by earnings]. It’s come to that, quite frankly,” said John Lynch, chief market analyst at Evergreen Investments. The stock market is expecting to see year-over-year profit growth of 17 percent, he said. “So it better be 20 percent for the market to be really impressed.”

Strong sales and favorable exchange rates spurred a 20 percent hike in profits at Johnson & Johnson, which beat estimates by 3 cents per share and saw its stock price rise a fraction to $51.39. Shares of Merrill Lynch, meanwhile, fell 1.9 percent to $58.61 after the firm posted record first-quarter earnings of $1.22 per share, beating analysts’ expectations by 15 cents per share.

Dow Jones saw its share price fall 2.1 percent to $47.94 after the media company reported a 73 percent drop in first-quarter earnings due to a one-time gain a year ago. The publisher of The Wall Street Journal beat analysts’ earnings expectations by 2 cents per share, however.

Shares of Dow component Intel rose a fraction to $27.67 in advance of its first-quarter earnings report, released shortly after the close of trading Tuesday. The semiconductor giant reported a sharply higher quarterly profit thanks to stronger computer demand.

After losing ground last week, stocks moved solidly higher Monday as investors set aside their concerns about a rise in violence in Iraq and looked ahead to a robust first-quarter earnings season.

Overseas, Japan’s Nikkei average closed Tuesday up 0.4 percent. Britain’s FTSE 100 rose 0.6 percent, France’s CAC-40 closed 0.9 percent higher, and Germany’s DAX index surged 1.4 percent.

The Associated Press contributed to this report.

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