Stocks slumped Monday, as investors sought to rebalance their portfolios after a stronger-than-expected report on retail sales stoked fears that the Federal Reserve may take a more aggressive stance toward raising interest rates at its policy meeting later this month.
Early Monday, the Commerce Department said U.S. retail sales rose a bigger-than-forecast 1.2 percent in May, spurred by strong consumer demand and record gasoline prices. While the data are evidence of an economy on sound footing, they also fed concerns that pent-up demand could drive prices higher.
The data show “consumers are spending, no matter what,” said Ozan Akcin, chief market strategist at Puglisi & Co.
“On the corporate side, inflationary pressures are in the pipeline because raw material costs are going up,” Akcin continued. “Everything’s headed in a northerly direction in terms of inflation, and the market’s pulling back because people are worried the Fed could raise rates more than expected.”
Russ Koesterich, U.S. equity strategist at State Street Corp, said the benign pace of rate increases that the market had discounted may not now be the same. “That doesn’t really make stocks look attractive,” he said. “There’s no real reason to go out and sell everything you own, but no real catalyst to buy, either.”
At Monday’s close, the Dow Jones industrial average was down 75.37 points, or 0.7 percent, while the broader Standard & Poor’s 500-stock index was down 11.18 points, or 1 percent. The tech-rich Nasdaq Composite index dropped 29.88 points, or 1.5 percent.
Stocks were stuck in negative ground for most of the day, but edged lower in the afternoon session as investors braced for May’s Consumer Price Index (CPI), the most widely watched gauge of inflation, due before Tuesday’s market open. Economists expect Tuesday's CPI data to show a gain of 0.4 percent.
A higher CPI number could force the Federal Reserve to lift interest rates by a half percentage point at its June 29/30 policy meeting instead of the quarter point Wall Street is expecting, economists said. Fed chief Alan Greenspan said last week that the central bank would do “what is required” to keep inflation in check.
Financial stocks were hit hardest by Monday’s sell-off. Technology shares and shares of other companies dependent on ready capital, which would become more expensive as rates go higher, also slumped. The Dow’s worst performing stock was semiconductor firm Intel, which fell 2.3 percent to $27.99.
In Monday’s other economic news, the Commerce Department said the U.S. trade deficit rose to a record $48.3 billion in April, up 3.8 percent from March’s previous all-time high. Higher oil prices contributed to the new record, as well as a drop in U.S. exports.
In corporate news, Dow component Wal-Mart’s shares fell 1.4 percent to $56.38 after saying it is sticking by its forecast for June sales. Last week, Wal-Mart said that a cycle persists of people waiting for their first-of-the-month paychecks to make purchases, a sign that many families continue to live paycheck to paycheck despite a recovering U.S. economy.
99 Cents Only Stores was among the top percentage losers on the New York Stock Exchange, dropping 31.5 percent to $14.04 after the discount chain operator slashed forecasts last week due to problems related to inventory controls and rising costs.
On Friday, the retailer forecast second-quarter earnings ranging from 4 cents to 7 cents a share, down from its previous view of 19 cents to 20 cents a share, and below analysts’ average view of 19 cents a share.
General Motors’ shares eased, even after the carmaker backed its quarterly and 2004 earnings targets, and added that the outlook for the global auto industry remains strong. Shares of GM fell 2 percent to $47.09.
MGM Mirage raised its bid for Mandalay Resort Group, now offering $71 a share for the rival casino operator, up from the previously rejected offer of $68 per share. The deal was negotiated with Mandalay, and is likely to be approved. Mandalay dropped 1.2 percent to $67.60, while MGM Mirage rose 1.3 percent to $48.20.
Nokia’s shares fell 1.1 percent to $14.08 after the firm announced production of five new cell phones and promising to regain lost market share. The company declined to give details on its 2004 forecast.
Declining issues outnumbered advancers by more than 4 to 1 on the New York Stock Exchange. Volume came to 1.25 billion shares, compared to 1.23 billion on Thursday.
Overseas, Japan’s Nikkei average finished Monday down 0.3 percent. In Europe, France’s CAC-40 tumbled 1.4, Britain’s FTSE 100 fell 1.1 percent and Germany’s DAX index was down 1.6 percent.