updated 6/29/2004 8:47:16 AM ET 2004-06-29T12:47:16

Stocks closed Monday lower, having given up all of the gains made earlier in the day following news of an earlier-than-expected transfer of sovereignty to an interim Iraqi government.

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Wall Street welcomed news early Monday that the United States governing authority had formally ended 14 months of occupation in Iraq two days ahead of schedule. The event, which was an apparent effort to forestall guerrilla attacks by insurgents seeking to disrupt the transition, came without incident, boosting investor confidence.

The handover news drove the Dow Jones industrial average up as much as 93 points in the morning session, but the index pulled back in afternoon trading, closing with a loss of 14.75 points, or 0.1 percent, while the broader Standard & Poor’s 500-stock index was down 1.08 points, or 0.1 percent. The Nasdaq composite index, full of technology stocks, was off 5.65 points, or 0.3 percent.

Market observers said the brief rally was little more than a short-term bounce, and that a lackluster sales forecast from General Motors and worries about rising interest rates had tempered investors’ enthusiasm for stocks.

“Clearly this event stirred a great deal of confidence and optimism, but that can be a fleeting thing,” said Hugh Johnson, chief investment officer at First Albany Corp. “Now that this is over with, you can expect investors to focus on what really counts this week, such as all the economic data coming out.”

Indeed, Wall Street’s attention now turns to the Federal Reserve’s two-day policy meeting, which begins tomorrow.

The central bank is widely expected to announce its first credit tightening in over four years at the conclusion of its meeting, raising the federal funds target rate — which banks charge each other on overnight loans — from its four-decade low of 1 percent to 1.25 percent.

Brian Pears, head equity trader at Victory Capital Management, told CNBC that he thought the Fed’s decision, if it comes in exactly as traders and economists expect, might be met with a market reaction as short-lived as the reaction the early Iraq handover.

“I’m afraid we’ll all go back to sleep after the Fed,” Pears said, adding that investors will be more focused on the wording of the Fed’s post-meeting policy statement, which may offer clues about the timetable for future rate hikes. “We'll see if we're going to get an increase of of 50 basis points or a series of 25 basis point increases,” he said.

Wall Street derived some comfort earlier in the day from news that crude oil prices had dropped sharply in reaction to reports that Iraq has ramped up exports after mending sabotaged pipelines and Norwegian oilfields resumed operations after a strike. Extra supplies from the OPEC cartel also reassured international markets.

One of the culprits for the market’s afternoon swoon, traders said, was Dow component General Motors, which warned of disappointing June sales. GM shares fell 2.4 percent to $46.51.

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Also, Dow member Wal-Mart Stores lowered its June sales forecast because of poor Father's Day demand and unusually cool weather that curbed sales of air conditioners and swimming pool supplies. Its share price finished flat at $52.46.

Shares of Altria Group, another member of the blue-chip Dow, rose 3.8 percent to $49.60 after Altria’s Philip Morris USA unit said the judge in the U.S. Justice Department’s $280 billion racketeering lawsuit against major tobacco companies agreed to allow an appeals court to review one of her decisions.

In other corporate news, the Air Transportation Stabilization Board said that after studying United Airlines’ latest application, submitted last week, for a federal loan guarantee, it would not change the panel’s June 17 decision to reject the airline’s request for a $1.6 billion loan.

Software giant Microsoft's stock price fell 1 percent to $28.28 after the European Commission temporarily suspended an order requiring Microsoft to sell a version of its Windows operating system without Microsoft’s media player software, just before the order would have taken effect.

(MSNBC is a Microsoft-NBC joint venture.)

And shares of Watson Pharmaceuticals fell 14.9 percent to $27.49 after the company forecast second-quarter and full-year results below Wall Street’s targets, citing lower-than-expected sales of women’s health and general products.

With consumer spending a strong barometer of the health of the economy, a higher-than-expected jump in both personal income and spending boosted investor confidence early Monday.

Before the open, the Commerce Department said U.S. consumer spending rose by 1 percent in May, far more than the 0.2 percent increase reported in April. The May figure was the largest increase since October 2001. U.S. incomes rose by 0.6 percent in May, the second straight month of increases.

A horde of major economic reports is due for release this week, including Friday’s jobs report for June, Tuesday’s consumer confidence survey and Thursday’s U.S. manufacturing report.

Overseas, Japan’s Nikkei average climbed 0.9 percent. In Europe, Britain’s FTSE 100 closed up 0.6 percent, France’s CAC-40 index added 0.8 percent and Germany’s DAX index was up 1.4 percent.

Reuters and the Associated Press contributed to this report.


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