US stocks: Dow falls below 11,000

NEW YORK - US stocks fell on Tuesday, taking the Dow below 11,000 for most of the afternoon, as investors grappled with the prospect of more interest-rate increases and slowing economic growth.

Late in the session, stocks trimmed most of their losses and the Dow managed to close just a whisker above the psychologically important 11,000 mark. It hadn't fallen below that level in three months.

A day after Federal Reserve Chairman Ben Bernanke's tough talk on inflation, more Fed officials warned about growing price pressure, cementing expectations of further rate hikes.

Shares sensitive to higher interest rates, including JP Morgan Chase & Co. and Bank of America Corp., were among the S&P 500's heaviest decliners.

Industrial stocks such as airplane maker Boeing Co., whose profits are closely tied to the economy's health, helped lead the Dow's decline.

Stock investors are nervous about inflation, including higher commodity prices, because it raises companies' costs.

"Bernanke ... really shook things up, and we're in the second day of the effect here," said Larry Peruzzi, senior equity trader at The Boston Co. Asset Management in Boston. "There continue to be inflationary concerns." The Dow Jones industrial average was down 46.58 points, or 0.42 per cent, to end at 11,002.14. The Standard & Poor's 500 Index was down 1.44 points, or 0.11 per cent, to finish at 1,263.85. The Nasdaq Composite Index was down 6.84 points, or 0.32 per cent, to close at 2,162.78.

For the year, the Nasdaq is down about 2 per cent. In contrast, the Dow is still up about 2.7 per cent and the S&P 500 is up about 1.3 per cent so far this year.

In Tuesday's session, the major US stock indexes fell below key technicals levels -- a move analysts say portends more downside pressure in the days ahead.

William Poole, president of the Federal Reserve Bank of St. Louis, said in a Wall Street Journal interview published on Tuesday that if inflation expectations keep rising, slower growth alone may not be enough to reduce actual inflation.

Fed Governor Susan Bies, talking to a bankers' group, said inflation, excluding food and energy, has been running in the high 2 per cent range for three quarters, "which personally makes me very uncomfortable." On Monday, Bernanke said the Fed will be vigilant on inflation even if economic growth starts to slow. The comments triggered a sell-off in stocks, and the Dow ended down almost 200 points and the Nasdaq plummeted more than 2 per cent.

In the banking sector, JPMorgan shares slumped 1.4 per cent, or 59 cents, to US$42.38 on the New York Stock Exchange. Bank of America Corp.'s stock was down 0.4 per cent, or 21 cents, at US$48.53.

Industrial stocks tumbled, with Boeing down 1.8 per cent, or US$1.48, at US$80.65, and United Technologies Corp. down 2.3 per cent, or US$1.40, at US$60.05.

General Motors Corp. cited inflation when it warned shareholders that meeting the automaker's cost-savings target would be very difficult. GM shares fell 3.1 per cent, or 80 cents, to US$25.25 on the NYSE.

HEADACHES FOR HOME BUILDERS

A brokerage downgrade of the home building and building products sectors added to weakness.

Wachovia cut home builder and building products shares to "market weight" from "overweight" and lowered its ratings on D.R. Horton Inc., KB Home, Lennar Corp. Inc. and Pulte Homes Inc.

D.R. Horton declined 5.6 per cent, or US$1.40, to US$23.41 and KB Home slid 6.7 per cent, or US$3.28, to US$45.82. Shares of Lennar fell 3.2 per cent, or US$1.50, to US$45 while Pulte shares dropped nearly 5.5 per cent, or US$1.64, to US$28.11.

In New York foreign-exchange trading, the dollar was up against a basket of major trading-partner currencies, with the US Dollar Index up 0.64 per cent at 84.79 from a previous session close of 84.25.

That added to weakness in shares of tech companies, which tend to be heavy exporters. Shares of Microsoft Corp. fell 1.6 per cent, or 37 cents, to US$22.13, and was the biggest drag on both the Nasdaq and the S&P 500.

"Their products get a little bit more expensive" with the rising dollar, Peruzzi said.

While the Dow fell below the 11,000 level, the S&P 500 slid under its 200-day moving average, a long-term trend line that measures a security's or a stock index's resilience.

One technical analyst said the next key level to watch on the Nasdaq is 2,025, and noted that breaking that level would take the index lower. The Dow's next support base is 10,750, he said.

Trading was heavy on the NYSE, with about 1.89 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 2.16 billion shares traded, above last year's daily average of 1.80 billion.

Declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on the NYSE and by 3 to 2 on Nasdaq.

- REUTERS