NEW YORK – The earlier-than-expected transfer of Iraqi sovereignty to an interim government provided a temporary boost to the market Monday, but stocks fell back to neutral as worries about the Federal Reserve's expected rate cut continued to haunt investors.
The Dow Jones industrial average (search) dropped 14.75 points, or 0.14 percent, to 10,357.09, while the Standard & Poor's 500 Index (search) dipped 0.91 of a point, or 0.08 percent, to 1,133.52. The technology-laced Nasdaq Composite Index (search) slipped 5.65 points, or 0.28 percent, to 2,019.82.
Investors had worried that the transfer in Iraq would be sabotaged by terrorists, and were cheered at the surprise move, which was originally scheduled for Wednesday. Oil prices also fell sharply on the news, further boosting stocks.
However, investor enthusiasm waned in antcipation of the Fed meeting Tuesday and Wednesday, and in response to a strong consumer spending report that fueled inflation worries.
"Clearly this event stirred a great deal of confidence and optimism, but that can be a fleeting thing," said Hugh Johnson, chief investment officer at First Albany Corp. "Now that this is over with, you can expect investors to focus on what really counts this week, such as all the economic data coming out."
Oil prices helped the stock market, falling more than a dollar as Iraq ramped up exports after mending sabotaged pipelines and extra supplies from the OPEC cartel reassured international markets. NYMEX (search) crude futures fell $1.47 to $36.08.
With the Iraqi power transfer out of the way, the spotlight has shifted to the Fed, market analysts said. The central bank is widely expected to raise interest rates by 25 basis points on Wednesday, its first raise in four years, taking the key overnight lending rate between banks to 1.25 percent from a 46-year low of 1 percent.
Investors, however, are likely to carefully scrutinize the Federal Open Market Committee's (search) accompanying statement for clues to how aggressive the Fed will be in hiking rates in the months ahead.
"It's really not the actual number, it's what they say going forward," said Mark Donahoe, managing director of institutional sales trading at U.S. Bancorp Piper Jaffray. "Are they going to be patient, or are they going to be more aggressive?"
According to the Commerce Department (search), consumer spending rose by 1 percent in May, far more than the 0.2 percent increase in April. The May figure was the largest increase since October 2001. Incomes rose by 0.6 percent in May, the second straight month of increases.
However, with spending on the rise, pricing power shifts to companies eager to raise prices to continue their stellar quarterly earnings trends. But that can also lead to inflation.
"I think these numbers were good, but it's been scaring the inflation bears just a little," said Ken Tower, chief market strategist for Schwab's CyberTrader. "But with the Fed meeting on Wednesday, I think we'll start to see things pick up even more through the rest of the week and we can really start a nice rally here."
In addition to the Federal Reserve decision Wednesday, investors were looking to manufacturing data, unemployment figures and the latest job creation data later in the week.
General Motors Corp. (GM), which said it will have difficulty racking up a sales gain for the month, fell $1.14, or 2.4 percent to $46.51, weighing on the blue-chip Dow.
Altria Group Inc. (MO), maker of Marlboro cigarettes, rose after the judge in the U.S. Justice Department's $280 billion racketeering lawsuit against major tobacco companies agreed to let an appeals court review one of her decisions.
Altria jumped $1.80, or 3.8 percent, to $49.60, making it the Dow's biggest percentage gainer.
But fellow Dow component Wal-Mart Stores Inc. (WMT) helped offset those gains, after it cut its June sales forecast. Wal-Mart's shares fell 5 cents to $52.46.
In corporate news, the European Commission on Sunday said it had temporarily suspended an order requiring Microsoft (MSFT) to sell a version of its Windows operating system without a media player software, just before the order would have taken effect. Microsoft rose 7 cents to $28.65. It was one of the most actively traded stocks on the Nasdaq.
Watson Pharmaceuticals (WPI) plunged $4.80 to $27.49 after the company said it would miss earnings forecasts in the second quarter due to slow sales of its oral contraceptive products.
Canadian news publisher Thomson Inc. (TOC) said it would buy Information Holdings Inc., a provider of patent and regulatory information, for $441 million. Thomson was down 31 cents at $31.98, while IHI was up $1.13 at $27.57.
Trading was moderate, with about 1.4 billion shares traded on the New York Stock Exchange and 1.6 billions shares traded on Nasdaq.
The Russell 2000 index of smaller companies was down 3.60, or 0.6 percent, at 584.10.
Overseas, Japan's Nikkei stock average climbed 0.9 percent. In afternoon trading, Britain's FTSE 100 closed up 0.6 percent, France's CAC-40 added 0.8 percent for the session and Germany's DAX index rose 1.4 percent.
Reuters and the Associated Press contributed to this report.