updated 4/21/2004 10:34:20 AM ET 2004-04-21T14:34:20

Stocks took a late-session dive Tuesday after Federal Reserve Chairman Alan Greenspan, confirming investors’ fears about interest rates, hinted in congressional testimony that a rate increase is indeed expected. The Dow Jones industrial average lost more than 120 points as the market’s earlier gains evaporated.

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Greenspan told Congress that the nation’s banking system is well prepared to deal with rising rates, which the market interpreted as a new signal that the Fed will tighten its policy sooner rather than later. The Fed chairman didn’t directly discuss interest rate policy in his remarks to the Senate Banking Committee, but was expected to do so Wednesday, before the Joint Economic Committee.

Few analysts were surprised by Greenspan’s remarks, but his suggestion that banks could weather a rise in rates sparked a sell-off, sending the major indexes plummeting in the final hour of what had been a lackluster session. It also erased earlier gains on solid earnings reports from Dow components General Motors Corp., Pfizer Inc. and Altria Group Inc.

The Dow Jones industrial average slumped 123.35, or 1.2 percent, at 10,314.50.

The broader gauges were also lower. The Nasdaq composite index closed down 41.80, or 2.1 percent, at 1,978.63. The Standard & Poor’s 500 index declined 17.73, or 1.6 percent, to 1,118.09.

“It’s a foregone conclusion that interest rates will move higher,” said Kevin Caron, market strategist, Ryan, Beck & Co. “I wouldn’t be at all surprised if they do begin to raise rates, and you see a burst of economic activity as folks go out and buy that new car, or buy a home, before rates go up higher.”

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Worries that interest rates will rise sooner rather than later have distracted investors from profit reports this earnings season. While most economists don’t expect the Fed to raise rates at its next meeting on May 4, many believe rates will move higher by the end of the summer. With so much advance warning, however, the rate hike itself is not expected to have much negative impact.

Until rates do go up, the markets are likely to remain volatile as large investors react to each new piece of economic information. Long-term investors should take heart, however: The underlying message is that the recovery is solid and the economy is expanding.

“I think there’s more risk being out of the market than in the market right now,” said Michael Murphy, head trader at Wachovia Securities in Baltimore. “The economy is showing us the expansion is for real and that will push investors back into the market. In the meantime, we’ll have days like this. The people who are really nervous more than likely are short term players.”

Providing further evidence that the economy is improving, most companies have reported first-quarter earnings that were at or above Wall Street’s expectations. Analysts surveyed by Thomson First Call forecast an average 17 percent rise in profits for the S&P 500.

General Motors Corp. rose $1.62 to $47.77, having topped expectations with strong results at its financing arm and improved business in Asia. Automotive operations in North America and Europe continued to be hampered by intense pricing pressure, however.

Pfizer Inc. was down 88 cents at $36.70 after reporting a 50 percent drop in net income on charges related to its acquisition of Pharmacia Corp. last year. But the results still beat analysts’ expectations and revenues jumped 47 percent.

Altria Group Inc., the parent company of Philip Morris and Kraft Foods, sagged 12 cents to $56.33 after reporting a slight rise in first-quarter profits due to strength in its tobacco business.

Kraft Foods Inc. lost 9 cents to $31.27 after reporting first-quarter profits that tumbled 34 percent amid continuing restructuring costs at the nation’s largest food company. Excluding the charges, the company would have beaten expectations.

Industrial manufacturer Ingersoll-Rand was down $1.19 at $70.81 after beating Wall Street expectations with a 17 percent increase in first-quarter profits as nearly all its businesses posted double-digit revenue increases.

Declining issues outnumbered advancers almost 3 to 1 on the New York Stock Exchange. Volume was moderate.

The Russell 2000 index, which tracks smaller company stocks, was down 11.14, or 1.9 percent, at 575.81.

Overseas, Japan’s Nikkei stock average finished 1.6 percent higher Tuesday. In Europe, France’s CAC-40 added 0.8 percent, Britain’s FTSE 100 gained 0.5 percent and Germany’s DAX index closed up 0.9 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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