Stocks Take Dive Even as Oil Prices Fall Again

Stocks tumbled on Wednesday despite another drop in oil prices, as some investors apparently worried that higher energy costs already had undermined the economy.

A report showing weaker-than-expected retail sales in March fanned concerns that consumer spending had hit a soft patch amid hefty prices at the gas pump, analysts said. Some downbeat corporate earnings reports added to the gloom.

The result was a sharp market sell-off that pushed the Dow Jones industrial average down 104.04 points, or 1%, to 10,403.93.

Broader market indexes suffered bigger declines. The Standard & Poor’s 500 lost 13.97 points, or 1.2%, to 1,173.79, and the Nasdaq composite slumped 31.03 points, or 1.6%, to 1,974.37.

Falling stocks outnumbered winners by more than 2 to 1 on the New York Stock Exchange and on Nasdaq.

Despite the latest pullback in oil, “we’re in an era of higher sustained energy prices, and that’s being reflected in the economic data such as the retail sales slowdown,” said Shelly J. Meyers, manager of Pacific Advisors Multi-Cap Value stock mutual fund in Glendale.

The government on Wednesday said retail sales rose 0.3% last month, less than half the increase that was expected.

Some analysts said it wasn’t clear that energy costs would have a sustained negative effect on consumer spending, particularly if oil stabilized at current levels or continued to fall.

But the economy, and the stock market, may face a bigger challenge in the Federal Reserve’s credit-tightening campaign, said Thomas McManus, investment strategist at Banc of America Securities in New York.

The Fed has raised its benchmark short-term interest rate seven times since June, to the current 2.75%. In the minutes of the Fed’s March 22 meeting, made public on Tuesday, policymakers voiced concern about inflation and indicated they expected to continue raising rates.

Still, stocks had rallied on Tuesday because the meeting minutes signaled that the Fed expected to hold to a “measured” pace of rate increases, meaning a quarter percentage point every six to eight weeks, analysts said. Some investors had feared that the Fed might speed up the pace of rate hikes.

On Wednesday, investors may have focused more on the sober reality that higher rates typically are a drag on the economy and share prices, even if the Fed is moving slowly, McManus said.

“Rising interest rates are starting to have an impact on consumers and on the valuation of stocks,” he said.

Higher interest rates on bank accounts and bonds mean more competition for stocks. To attract investors, companies may have to present a compelling story -- for example, the promise of robust earnings growth.

But profit growth overall is slowing from the double-digit rate of 2004. The average blue-chip company is expected to report that first-quarter earnings rose 8% from a year earlier, according to data tracker Thomson First Call in Boston.

On Wednesday, some disappointing earnings reports helped pull Wall Street lower. Motorcycle maker Harley-Davidson, for example, reported higher first-quarter results, but cut its growth forecast for the full year. Harley shares plummeted $9.84, or nearly 17%, to $48.93.

Downbeat profit forecasts from tech firms such as software maker Compuware, networking equipment maker Foundry Networks and chip equipment maker ASML Holding also contributed to the selling mood, said Russ Koesterich, a portfolio manager at Barclays Global Investors in San Francisco.

Compuware lost 81 cents to $6, Foundry Networks fell 45 cents to $9, and ASML Holding slid $1.03 to $15.28.

Stocks also fell sharply in the energy, commodity, industrial and transportation sectors.

The combination of oil prices still above $50 a barrel, mixed economic data and slowing earnings growth is “creating a malaise in the market,” Koesterich said. “There’s no compelling catalyst for a rally.”

Meyers said the surging U.S. trade deficit, which hit a record $61 billion in February, also boded poorly for the economy.

Still, analysts noted that major market indexes hadn’t declined significantly from their recent highs. The Dow is down 4.9% from the four-year high of 10,940 it reached on March 4. The Nasdaq, which has declined more than most indexes this year, is down 9.4% from its recent peak reached on Dec. 30.

A drop of about 10% in an index is considered a typical pullback, or “correction,” within a continuing bull market.

In the bond market on Wednesday, Treasury yields were mixed. The yield on the 10-year T-note inched up to 4.36% from 4.35% on Tuesday.

Investors often buy Treasuries, driving yields lower, when the economy is expected to slow. The lack of a rally on Wednesday may have stemmed from a disappointing auction of $15 billion in new five-year T-notes, some analysts said. The yield on the notes was 4.05% as the government received fewer bids than expected.