Wednesday, May 17, 2006

US stocks plunged along with other stock markets overseas as a greater than expected rise in consumer prices fueled investors' fears that the Federal Reserve's campaign of raising interest rates is not over. At the close of trading at 4:00 PM EDT, the Dow Jones Industrial Average had fallen 214.28 points, or 1.88%, to 11,205.61. Technology stocks were not safe from the selling as well, as the NASDAQ fell 33.33 points, or 1.50%, to 2,195.80. The NASDAQ has now turned negative for 2006. Broader stock indices also finished much lower. The S&P 500 fell 22 points (1.68%) to 1,270.32. This is the biggest point loss on the Dow in 3 years.

The Consumer Price Index (CPI) showed that prices to the consumer increased by a greater-than-expected 0.6% in April. Core CPI, which factors out volatile food and energy prices, swelled by a greater-than-expected 0.3%.

Market breadth was extremely negative with advancers beating out decliners by a 5 to 1 ratio on the New York Stock Exchange. Volume was heavy with 2.95 billion shares changing hands. Of the 30 stocks that make up the Dow Jones Industrials, 29 of them closed down for the day. The only stock in positive territory was Hewlett-Packard, which closed up $1.05 (+3.38%) to $32.16/share after reporting quarterly earnings after the close Tuesday.

The selloff comes on the heels of the Dow rising to within 80 points of its all-time closing high of 11,722.98 just last week. That rally was built on hopes that the Federal Reserve was close to ending its interest rate hike campaign. Since that time the Dow has experienced 3 double-digit point losses. Many market analysts and technicians, including Ken Tower from Schwab's CyberTrader, felt that the market was overbought and was due for a short-term correction. Today's inflation report suggests that the Fed might have to tighten interest rates further to combat inflation and slow economic growth to a more sustainable pace. Higher interest rates increase the cost of money, thus discouraging borrowing by businesses and individuals.

European stock markets fell more sharply than those in the US. London's FTSE fell 2.92%, Frankfurt's DAX tumbled 3.4%, and Paris' CAC 40 fell 3.18%.