Fed’s inflation concerns slam stocks

/ Source: msnbc.com news services

Stock indices tumbled Tuesday, as investors extended a spate of profit-taking that has erased nearly a month of Wall Street’s gains in the first two sessions of 2005.

The catalyst for the sell-off was minutes from the Federal Reserve’s Dec. 14 policy meeting, released shortly after 2 p.m. ET. A number of Fed officials said a drop in productivity growth, a weakening U.S. dollar and high crude oil prices could all contribute to inflation. The committee members also expressed concern over increased risk-taking in the financial markets.

The minutes hinted that interest rates may have to move higher more aggressively to strengthen the dollar and curb inflation. The Fed had been promising steady, measured hikes in the benchmark federal funds rate, which stands at 2.25 percent after the Fed’s quarter percentage point increase in December.

“The Fed’s minutes were a big problem [for the market],” Arthur Cashin, a managing director at UBS, told CNBC from the floor of the New York Stock Exchange. “They put the bond market into a tailspin, and now that’s being reflected in the stock market. It’s starting to look like 2004 was a better year for the market.”

Stock indices slumped after the Fed’s minutes were released, and trading volumes rose sharply, as investors sold off equities, exacerbating losses in a session in which investors sold small-cap stocks and riskier investments for a second straight day.

The Dow Jones industrial average finished the day down 98.65 points, or 0.9 percent, while the broader Standard & Poor’s 500-stock index was off 14.03 points, or 1.2 percent. The Nasdaq Composite index, full of technology stocks, tumbled 44.29 points, or 2.1 percent, posting its biggest one-day decline since Aug. 6. U.S. Treasury debt prices slid, boosting short-term yields above two-year peaks.

The Fed’s minutes overshadowed more upbeat news released earlier in the session, including Rayovac’s $476 million purchase of United Industries, a privately held lawn care and pet supply company, and renewed strength in the U.S. dollar.

The stock market’s losses over the past two days have erased substantial gains from the past month, with the Dow industrials and the S&P 500 reaching their lowest levels since the second week of December and the Nasdaq Composite falling to its lowest close since Nov. 30.

Tuesday’s sell-off was intensified by climbing oil prices, with tight supplies of heating oil and evidence that Saudi Arabia was cutting back on production blamed for the increase. A barrel of light crude settled at $43.91, up $1.79 on the New York Mercantile Exchange.

Still, analysts were hesitant to call the past two days of selling a reversal of the November and December rally, noting that Friday’s job creation report from the Labor Department and the start of fourth-quarter earnings season next week could give stocks a boost and extend Wall Street’s post-election rally. However, a shortfall in new jobs or disappointing earnings could do the opposite.

“The economy does seem to be either accelerating or at least maintaining a steady pace, which is a good sign that this rally could continue,” said Ken Tower, chief market strategist for Schwab’s CyberTrader. “It would be very odd for a rally that strong to just roll over and die. Dramatic reversals are unusual. But we’ll just have to wait and see.”

Wall Street pushed automakers’ stocks lower as they announced their December sales figures. Ford Motor Co. fell 5 cents to $14.66 after it said last month’s sales fell 3.6 percent and 2004 sales were down 4.9 percent. General Motors Corp. reported a 7 percent drop in December sales, and a 1.4 percent drop for the year, sending GM stock down 41 cents at $39.89. DaimlerChrysler AG, despite an 11 percent surge in December sales and a 3 percent jump for the year, lost 26 cents to $47.42.

Rayovac Corp. announced the first major acquisition of 2005, a $476 million purchase of United Industries Corp., a privately held lawn care and pet supply company. Rayovac surged $5.09 to $34.65 on the news of its agreement with United Industries, which includes the assumption of $880 million in debt.

Krispy Kreme Doughnuts Inc. fell as a shareholder lawsuit alleged the troubled doughnut maker frequently padded its sales figures by over shipping doughnuts to its wholesalers, knowing that many would be returned. Krispy Kreme, which said it plans to restate earnings for its past fiscal year, lost $1.80 to $10.48.

Amazon.com Inc. fell $2.38 to $42.12 after Smith Barney downgraded the online retailer’s stock to “sell” from “hold,” citing concerns over increasing competition. Analysts at the brokerage said Amazon will have to invest heavily in marketing and new technologies to retain its Internet sales leadership position.

Eastman Chemical Co. said its fourth-quarter earnings will come in at the lower end of its previous forecasts due to high raw materials costs. Although the chemical company said its profit margins will improve in 2005, shares of Eastman tumbled $5.11 to $52.19.

Overseas, Japan’s Nikkei stock average rose 0.25 percent. In Europe, Britain’s FTSE 100 closed up 0.68 percent, France’s CAC-40 climbed 0.2 percent for the session, and Germany’s DAX index slipped 0.02 percent.