Stocks finished broadly lower Monday, as comments from Federal Reserve Chairman Ben Bernanke fanned fears of further interest-rate hikes, while a warning from Iran pushed oil prices higher. Concerns of inflation and slowing growth also weighed on the market before the Fed chief's speech, says Standard & Poor's Equity Research.
The Dow Jones industrial average fell 199.15 points, or 1.77%, to 11,048.72, its lowest close since March 8, led downward by Caterpillar (CAT). The broader Standard & Poor's 500 index dropped 22.93 points, or 1.78%, to 1,265.29. The tech-heavy Nasdaq composite shed 49.78 points, or 2.24%, to 2,169.62.
Market players were assessing Bernanke's tough inflation talk Monday. Speaking at a forum of leading global bankers, the Fed chief called the recent uptick in core inflation "unwelcome," but he added that consumer spending has slowed "noticeably." After the speech, futures markets reportedly assessed a 74% chance the Fed will raise rates when it meets June 28 and 29.
Still, Bernanke's remarks don't substantially alter the outlook on interest rates, some analysts say. "If you go back to the minutes there was a long discussion about inflation expectations, and talking macho like this with regard to rates helps contain those inflation expectations," says Keith Hembre, chief economist at First American Funds. "It's one of the policy tools you use without actually moving the funds rate up."
Some analysts worry about "stagflation," or slow economic growth with high inflation. "What the market is really looking at here is a situation where interest rates are moving up to chase inflation, and at the same time a softening economy," says Peter Cardillo, chief market analyst at S.W. Bach.
Others maintain that a slowdown should be a bigger concern than inflation. "Inflation fears are overblown," says Stephen Roach, chief economist at Morgan Stanley. "They stem mainly from the statistical fiction of an increase in shelter costs in the U.S. and fail to take account of the increasingly powerful disinflationary headwinds of globalization."
Earlier in the session, the Institute for Supply Management's service index slipped to 60.1 for May, close to expectations, after April's stronger-than-expected 63.0.
Investors were also weighing an overnight rally in oil prices, driven partly by reports Iran will cut off oil supplies through the Persian Gulf if the U.S. takes actions against its nuclear facilities. In the energy markets Monday, July West Texas Intermediate crude oil futures closed up 27 cents at $72.60 a barrel, well off early highs, but the pullback failed to aid equities.
In corporate news, Apple (AAPL) was lower after reportedly deciding to close a proposed support center in Bangalore, India.
Internet phone company Vonage (VG) was higher despite its customers filing a class action suit that charges the company with violating securities laws and improperly selling shares.
Chipmaker Micron Technology (MU) was lower after an initial rise on a report the company could add $1 billion in revenue for fiscal 2007 from NAND flash memory, a component of digital cameras and music players.
Shares of Nasdaq (NDAQ) fell despite an early boost from J.P. Morgan Chase, which initiated coverage of the stock with an overweight rating.
In other analyst calls, Citigroup reportedly downgraded FTD Group (FTD) from buy to hold. Meanwhile, Prudential upgraded JetBlue (JBLU) from underweight to overweight.
Pharmaceutical companies like Amgen (AMGN), AstraZeneca (AZN) and Bristol-Myers Squibb (BMY), among others, were also in focus after the American Society of Clinical Oncology annual conference.
M&A activity continued. Laserscope (LSCP) was sharply higher on news the medical equipment maker was being acquired by American Medical Systems (AMMD) in a $715 million deal.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index edged down 2.5 points, or 0.04%, to 5,762.1. Germany's DAX index fell 65.85 points, or 1.16%, to 5,621.19. In Paris, the CAC 40 index dropped 43.66 points, or 0.88%, to 4,916.04.
Asian markets finished mixed. Japan's Nikkei 225 index fell 121 points, or 0.77%, to 15,668.31. In Hong Kong, the Hang Seng index rose 103.52 points, or 0.65%, to 16,016.23. Korea's Kospi index slid 7.42 points, or 0.57%, to 1,301.62.
Treasury yields ticked higher on Bernanke's remarks. Prices for 10-year Treasury notes fell to 100-25/32 with a yield of 5.02%, while 30-year bonds slipped to 90-26/32 for a yield of 5.1%.