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Dow closes just over 11,000 as sell-off continues

Wall Street has bigger problems than Ben Bernanke. The big question on the Street these days is whether investors’ miserable May will turn into a gloomy June and a sullen summer.
/ Source: The Associated Press

Wall Street has bigger problems than Federal Reserve Chairman Ben Bernanke.

The big question on the Street these days is whether investors’ miserable May will turn into a gloomy June and a sullen summer. After a 44-month bull run, some strategists say stocks are due for a serious correction while others argue the market is just pausing before it marches higher.

The two-day sell-off that started after Bernanke’s hawkish comments on inflation Monday has taken the Dow Jones industrial average to levels not seen since the beginning of March.

The rout began after Bernanke told an international monetary conference that core inflation, which excludes energy and food, was rising at an annual rate of 3.2 percent by one inflation gauge and 3 percent by another.

“These are unwelcome developments,” he said.

Wall Street read his comments as a hint that more interest rate hikes are on the way, which is the last thing investors want. After the Dow fell 199 points Monday, it lost another 46.58, or 0.42 percent, to 11,002.14 on Tuesday.

Broader stock indicators drooped. The Standard & Poor’s 500 index fell 1.44, or 0.11 percent, to 1,263.85, and the Nasdaq composite fell 6.84, or 0.32 percent, to 2,162.78. Falling stocks outnumbered advancers by 2 to 1 — the ratio was 4 to 1 on Monday.

The sell-off spread to global markets as well, further unnerving American investors who had enjoyed robust returns abroad. Tokyo’s Nikkei 225 index lost 1.81 percent Tuesday, while India’s benchmark index fell 2.51 percent. The major European indexes also dropped, with Ireland’s benchmark index down 4.89 percent and Austria’s benchmark falling 4.75 percent.

The pros are trying to steel their clients for more swings. Markets haven’t seen much volatility over most of the last 12 months and investors have grown used to the absence of daily drama.

In a note to clients Tuesday, Timothy L. Swanson, chief investment officer at National City, the nation’s ninth-largest bank, wrote, “Repeat after me, ’I am a long-term investor.’... It’s just five simple words, yet after two days of stock market volatility, many investors are getting choked up before they can get the words out.”

He continued, “If your time horizon is two days, you shouldn’t be in the stock market — stocks are more volatile than cash, always have been and always will be.”

Swanson counseled his clients to sit tight. National City argues that the Fed is looking at economic data to guide its interest rate decisions — and that the data, such as last week’s soft employment numbers, points to a slowing economy, which means the Fed should soon stop raising interest rates.

“The fundamentals haven’t changed,” agrees John Caldwell, chief investment strategist for McDonald Financial Group, part of Cleveland-based KeyCorp. “The Fed is almost done.”

The bears see it differently.

Ralph Acampora, managing director of technical research at Knight Capital Group, started the year by predicting stocks would fall 20 to 25 percent. He feels the catalyst for a fall could be investors’ recent realization that commodity prices, such as oil, copper and gold, are sky-high.

“You have all these factors going on,” he said. “What Bernanke said the other day is the pin that hit the balloon.”

While the Fed struggles attempts to make rational decisions, some observers say investors continue to be less than rational, which worries them more than anything else.

Friday’s soft payroll data should have sparked a rally, since it would point to a halt of rate hikes, argues David A. Rosenberg, the North American economist at Merrill Lynch. But it didn’t.

When traders don’t buy even when they get good news, “the stock market looks to be in a spot of trouble,” he wrote.