Stocks ended Wednesday's seesaw session slightly lower, as worries about a rise in inflation and forecasts of higher interest rates eclipsed some upbeat corporate earnings. Tepid outlooks from companies like Intel Corp. also pressured the market.
A higher-than-expected rise in consumer prices stoked anxiety over interest rates, sending stocks lower in early trading on knee-jerk selling, but the market stabilized soon after and settled into a meandering pattern for the remainder of the trading session.
At the close, the Dow Jones industrial average was off 3.33 points, or 0.03 percent, slightly extending Monday's 134-point slump. Analysts said Tuesday’s more moderate loss was a positive sign that shows investors understand that the economy remains healthy.
"The good news is that the recovery appears firmly in place, with stronger employment, strong retail sales and good corporate profit reports,” said Rick Giesen, director of value equity for National City Investment Management in Cleveland. “The bad news is on the inflationary front, and that some of the fears about a rate tightening are negatively impacting stocks and bonds.”
Inflation concerns drove U.S. Treasury bond prices lower, pushing yields to their highest levels in a year. Broad stock indices fell slightly. The Nasdaq composite index, full of tech stocks, was down 5.23 points, or 0.3 percent at the close, while the Standard & Poor’s 500-stock index was down 1.27 points, or 0.1 percent.
Interest-rate sensitive stocks, such as financials, suffered Wednesday as rate-wary investors moved assets into more cyclical areas, like the pharmaceutical and health care sector.
Bank of America Corp. fell 41 cents to $80.09, despite reporting earnings that beat analyst expectations. Other financial stocks also declined on rate fears, including American Express was down $1.60 at $49.80 and J.P. Morgan Chase & Co lost 77 cents to $39.27.
Shares of several drug companies rose. Johnson & Johnson added $1.21 to $52.60 and Pfizer Inc. was up 42 cents at $35.81.
Concerns about inflation were renewed by a government report, released early Wednesday, that shows consumer prices rose by 0.5 percent in March, a higher reading than the 0.3 percent advance forecast by economists.
The increase in the Consumer Prices Index, or CPI, the government’s most closely watched inflation barometer, was driven by more expensive gasoline, airfares and clothing. Excluding energy and food costs, "core" consumer prices rose by 0.4 percent in March, recording their biggest increase since November 2001.
The Federal Reserve been slow to raise a key short-term interest rate off its current 45-year low in part because of a long period of low inflation. But Fed chief Alan Greenspan and other policy makers have indicated a change is coming, but they haven’t said when.
Strong retail sales for March, reported Tuesday, and recent data pointing to an improving labor market have stirred fears among investors that a rate hike will come sooner rather than later. Lehman Brothers predicted the Fed could act as early as September, instead of sometime in 2005 as the brokerage firm previously believed.
Brian Fabbri, chief North American economist at BNP Paribas, thinks the Fed may begin to raise rates even sooner.
“I expect the third quarter is the right moment for Fed to act,” Fabbri told CNBC. “The economy is absolutely booming, and I’m looking for 6 percent growth in first-quarter GDP. The economic data have been good and the surprises are coming on the strong side.”
Rates will have to rise substantially before they’ll dent companies' bottom lines, said Brian Bush, director of equity research, Stephens Inc. in Benton, Ark. But investors’ concern about when rates will rise and ongoing tension over the U.S.-led campaign in Iraq may increase market volatility in the coming months.
“The prospect for higher rates along with the geopolitical environment are capping stocks in somewhat of a tight trading range right now, when otherwise if we were getting these good earnings report, stocks would be moving higher,” Bush said.
On the corporate earnings front, Intel fell 30 cents to $27.37 after missing earnings expectations despite an 89 percent profit spike on demand for computers and other high-tech gear. The world’s largest chip maker also disappointed some analysts with its revenue forecast.
McDonald’s Corp. sank $1.27, or 4.5 percent, to $27.00 after the fast food bellwether reported strong March sales and said its earnings would likely beat Wall Street estimates, but warned of lighter growth in the European market.
Among gainers on the Dow, DuPont Co. rose $1.31 to close at $45.00 after the chemical company announced its first-quarter earnings would be significantly higher than earlier forecast, partly because of improvements in its agriculture and nutrition businesses.
Declining issues outnumbered advancers more than 3 to 1 on the New York Stock Exchange. Volume was light. The Russell 2000 index, which tracks smaller company stocks, fell 3.82 points, or 0.6 percent, to 582.01.
Overseas, Japan’s Nikkei average slipped 0.2 percent Wednesday. In Europe, France’s CAC-40 ended down 1.2 percent, Britain’s FTSE 100 declined 0.7 percent and Germany’s DAX was down 1.4 percent.