NEW YORK – U.S. stocks fell Tuesday after Federal Reserve Chairman Ben Bernanke warned inflation is still a major concern, all but dashing remaining hopes for an interest-rate cut this year.
Surging bond yields not only fueled nervousness about escalating corporate borrowing costs, but posed stiff competition to utilities and other stocks that pay high dividends. FPL Group helped pull the S&P utility index down 1.5 percent.
Losses were recorded across the board, with 27 of the Dow's 30 components finishing lower, and the S&P 500 snapped a six-day streak of gains.
Bernanke said the economy is set to grow at a moderate pace, close to or slightly below its current pace, in coming months, but he warned that the risks of elevated levels of inflation, excluding food and energy, may not recede.
"There are lingering fears about inflation. Will the Fed not ease rates, but will it have to tighten?" said Jim Paulsen, chief investment officer of Wells Capital Management in Minneapolis.
"And what does that mean for the favorable liquidity environment that has been one of the main driving forces of the rally? This is an equity market reassessment."
He added that bond yields were reaching levels where "they're beginning to bite a little bit."
The Dow Jones industrial average slid 80.86 points, or 0.59 percent, to end at 13,595.46. The Standard & Poor's 500 Index fell 8.23 points, or 0.53 percent, to finish at 1,530.95. The Nasdaq Composite Index declined 7.06 points, or 0.27 percent, to 2,611.23.
The yield on the 2-year U.S. Treasury note rose to 5 percent for the first time since January after data from the Institute for Supply Management showed a jump in services activity in May, signaling a rebound in second-quarter economic growth. The data followed last week's ISM report showing manufacturing activity was stronger than expected.
Housing-related stocks fell after Bernanke said the building slowdown is likely to drag on longer than expected.
Also weighing were profit warnings from retailer Bed Bath & Beyond Inc. (BBBY) and kitchen cabinet maker American Woodmark Corp.
Bed Bath & Beyond blamed its earnings warning on weak consumer demand for home goods. Its shares fell 5.4 percent to $38.27 and were the biggest drag on the Nasdaq 100.
American Woodmark's shares lost 9.6 percent to $34.28 on the Nasdaq after the company said 2008 earnings would not meet Wall Street's expectations.
Home Depot shares fell 1.8 percent to $38.86 on the New York Stock Exchange and ranked among the Dow's top decliners.
The recent rise in bond yields could discourage would-be home buyers from taking out mortgage loans, which adds to the woes of housing-related stocks. The yield on the benchmark 10-year note rose to 4.99 percent.
Shares of consumer-oriented companies, including retailers, also took a beating on interest-rate concerns. The S&P index of retail stocks dropped 1.1 percent.
Among utilities, FPL Group (FPL) fell 2.5 percent to $61.34, while FirstEnergy (FE) lost 2.3 percent, slipping to $67.72.
DuPont Co. (DD) was one of the heaviest weights on the Dow after Lehman Brothers cut its rating on the stock to "equal weight" from "overweight." The chemical company's stock fell 1.8 percent to $52.24 on the NYSE.
While the interest-rate worries may have diverted investors' attention away from corporate deal-making, the takeover frenzy that helped fuel the stock market's spring rally continued.
Telephone equipment company Avaya Inc. (AV) agreed to be acquired by private equity firms TPG Capital and Silver Lake for $8.2 billion, sending Avaya shares up 1.9 percent to $17.03 on the NYSE.
And shares of Dow Jones & Co. (DJ) rose 0.6 percent to $60.50 after Los Angeles billionaire Ron Burkle joined Dow Jones employees to try to counter a $5 billion bid for the company from Rupert Murdoch's News Corp. (NWS), a union official said.
Trading was light on the NYSE, with about 1.52 billion shares changing hands, below last year's estimated daily average of 1.84 billion.
On the Nasdaq, about 2.23 billion shares traded, above last year's daily average of 2.02 billion.
Declining stocks outnumbered advancing ones by a ratio of about 3 to 1 on the NYSE and about 2 to 1 on the Nasdaq.