Aug. 4 (Bloomberg) -- U.S. stocks retreated for a third day as falling fuel prices sent energy shares to a six-month low, overshadowing gains in consumer companies.

Exxon Mobil Corp. dropped to a 16-month low as oil slid $3.67 a barrel on speculation Tropical Storm Edouard won't cause disruption to most offshore oil drilling rigs. Freeport-McMoRan Copper & Gold Inc. dropped the most in seven years and led raw- materials producers to the lowest level since January as a gauge of commodity prices posted its biggest retreat since March. The tumble in crude spurred gains in consumer and transportation shares that pared the market's decline.

The Standard & Poor's 500 Index lost 11.29 points, or 0.9 percent, to 1,249.02. The Dow Jones Industrial Average slipped 42.17, or 0.4 percent, to 11,284.15. The Nasdaq Composite Index sank 25.4, or 1.1 percent, to 2,285.56 More than two stocks dropped for each that rose on the New York Stock Exchange.

``There's going to be continued rotation out of energy stocks if we continue to see weakening oil prices,'' said Wayne Wilbanks, chief investment officer at Wilbanks Smith & Thomas in Norfolk, Virginia, which manages $1.2 billion.

Oil's decline sent energy companies in the S&P 500 down more than 20 percent from their May 20 record. The 10-week bear-market plunge was led by the two biggest U.S. refining companies, Tesoro Corp. and Valero Energy Corp., which lost 42 percent and 38 percent, respectively. Range Resources Corp., the Fort Worth, Texas-based producer of natural gas from rocky deposits, slid 43 percent since May 20 for the energy index's biggest retreat.

Energy Retreat

Exxon, the biggest U.S. energy producer, lost $3.12 to $76.60 today, the lowest since April 2007. Schlumberger, the largest oilfield-services company, retreated $5.79 to $94.41.

The S&P 500 Energy Index lost 4.9 percent, the steepest decline since March 19, and sank to its lowest level since Feb. 8.

Nymex crude futures fell 5.9 percent since the energy index reached its record on May 20 and are down 16 percent from the July 3 high. The so-called crack spread, or hypothetical profit margin for processing three barrels of crude into two barrels of gasoline and one of heating oil, has tumbled 39 percent since May 20 to $9.90, according to data compiled by Bloomberg.

Energy, the third-largest of the 10 industries in the S&P 500 after technology and financials, was the best performing group in the 12 months through June 30 as crude oil and natural gas prices almost doubled. The group rose 23 percent compared with a 15 percent loss for the broad index.

Since mid-year, energy is the worst performing group with a nearly 18 percent loss, compared with a 2.4 percent drop for the S&P 500.

Bear Markets

Six of the 10 industry groups in the S&P 500 have now declined 20 percent or more from their recent highs, with commodity companies, drug and household-product makers and utilities avoiding a bear market.

The drop in crude overshadowed a government report showing faster inflation and sent the S&P 500 Consumer Discretionary Index to its first advance in three days.

McDonald's Corp., the largest restaurant chain, added 78 cents to $60.55. Walt Disney Co., the world's largest theme-park operator, climbed 1 percent to $30.37.

Consumer inflation in June climbed 0.8 percent, the most since September 2005, the Commerce Department said. The Federal Reserve's preferred gauge of prices, which excludes food and fuel, increased 0.3 percent, more than forecast, after a 0.2 percent gain the previous month.

Credit Concerns

Financial shares led the market lower in early trading after HSBC Holdings Plc, Europe's largest bank by market value, said its first-half pretax loss in North America was $2.9 billion, compared with profit of $2.4 billion in the year-earlier period.

U.S. consumer bad loan charges and other provisions rose 85 percent to $6.8 billion at HSBC. The shares dropped 1.1 percent in London.

Credit losses stemming from falling home prices may rise to $2 trillion, New York University economist Nouriel Roubini said in an interview with the weekly newspaper Barron's. The International Monetary Fund in April estimated losses will total $945 billion, and hedge fund manager John Paulson in June forecast $1.3 trillion.

Bank of America Corp., the second-largest U.S. bank by assets, slid 71 cents to $32.62. JPMorgan Chase & Co., the third- biggest, lost 62 cents to $40.14.

Wachovia Corp. fell the most in a week, dropping $1.87, or 9.9 percent, to $17.11. Morgan Keegan & Co. urged investors to sell the shares before the chief executive officer of the fourth- largest U.S. bank meets today with analysts.

Fed Watch

Traders priced in 92 percent odds that the Fed will hold its benchmark interest rate unchanged at 2 percent tomorrow, Fed funds futures trading indicates, as the risks of both faster inflation and slower growth mount. Traders are pricing in a 29.8 percent chance of a quarter-point increase at the central bank's September meeting.

Freeport-McMoRan lost 12 percent to $80.35, its biggest drop since July 2001, leading the S&P 500 Materials Index to a 4.2 percent drop.

Copper prices plunged as much as 4.3 percent, the most in almost a month, as rising inventories spurred concern demand is declining. Gold fell 1 percent to $907.90 an ounce. The Reuters/Jefferies CRB Commodity Index slid 3.4 percent, its biggest one-day decline since March.

Health-Care Rally

Humana Inc. rose 4.9 percent to $46.81, the highest since June 13. The second-biggest provider of U.S.-funded health insurance raised its full-year earnings projection as costs moderated in Medicare drug plans for the elderly. Profit for the second quarter beat analysts' estimates.

Kindred Healthcare Inc. rose 6.1 percent to $31.07. The largest U.S. operator of hospitals for patients needing long-term care was raised to ``outperform'' from ``market perform'' by Wachovia Corp. analyst William Bonello.

The S&P 500 Health Care Index jumped 1.3 percent, its biggest advance in two weeks.

Motorola Inc. had the steepest gain in the S&P 500, rising 11 percent to $9.82. The largest U.S. mobile-phone maker hired Qualcomm Inc's Sanjay Jha as co-chief executive officer, readying the business for next year's split.

All of the 23 developed nations in the MSCI World Index except for Canada have experienced bear-market plunges of 20 percent or more since September. Among the 25 developing countries in the MSCI Emerging Markets Index, only Jordan and Morocco avoided such slumps.

`Dance With the Bear'

``We're all learning to dance with the bear and trying not to get mauled,'' Scott Richter, portfolio manager at Fifth Third Asset Management in Cleveland, said on Bloomberg Television. FTAM oversees $21 billion. ``There's no doubt that the economy is in a very fragile state. It's grinding ahead at a very below-par type of pace.''

Investors in the S&P 500 lost money in July for the second straight month, and in all but two of the first seven months of this year. The index of large U.S. companies is down 15 percent this year, and 20 percent from its October record. S&P 500 earnings are poised to fall for a fourth straight quarter led by banks, whose combined losses stemming from the collapse of U.S. home prices exceed $480 billion globally.

Second-quarter profits at S&P 500 companies that have reported results so far dropped 20 percent on average. Financial earnings are down 82 percent from the year-earlier quarter.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: August 4, 2008 16:30 EDT