Rising Cost of Raw Materials Hits Stocks

Wall Street suffered its biggest sell-off in nearly four months Thursday as a fresh surge in oil and commodity prices stoked fears that inflation pressures are building and that the Federal Reserve might continue to push up interest rates.

Only a day before, the Dow Jones industrial average had edged to within 80 points of a record close. But rising energy costs, lower-than-expected retail sales numbers and lingering concerns about the Fed’s direction combined Thursday to send stocks broadly lower.

The Dow retreated 141.92 points, or 1.2%, to 11,500.73. The technology-laden Nasdaq plummeted 48.04 points, or 2.1%, to 2,272.70. The Standard & Poor’s 500 index of blue-chip shares sank 16.93 points, or 1.3%, to 1,305.92.

Small-company stocks, which have spearheaded the market’s rise in recent years, were thrashed. The Russell 2,000 index tumbled 2.4%. Even stocks of oil and gold-related companies -- which generally rise in tandem with prices of these commodities -- fell with the rest of the market.

“This is probably a shakeout the market needed, but it’s very broad-based,” said Todd Clark, director of trading at Nollenberger Capital Management in San Francisco.

Losers topped winners by nearly 4 to 1 on the New York Stock Exchange.

The sell-off appeared at least in part to be a delayed reaction to the Fed’s meeting Wednesday. The central bank boosted its benchmark interest rate to 5%, as expected, but said further hikes “may yet be needed.” Many investors had been looking for a sign that the Fed would take a pause after its latest increase.

These investors believe the economy will cool on its own because of a decelerating housing market and rising gas prices. Further rate hikes, they say, could choke the economy and decapitate the bull market.

“The biggest risk that faces the market is that the Federal Reserve will be seduced by worries about inflation into raising rates too high,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y.

Jim Glassman, senior economist at JPMorgan Chase Securities in New York, said investors should take comfort in the fact that the Fed is being vigilant about inflation.

“I don’t know what problem the market thinks there is,” he said.

Glassman said Wall Street’s unease probably stems from the fact that new Fed Chairman Ben S. Bernanke is not telegraphing his intentions the way his predecessor, Alan Greenspan, would have done. But that’s natural given that Bernanke has his own style, he said, and investors simply have to get used to it.

Johnson said that with another month of economic data still to come before its next meeting in June, the Fed is smart to keep its options open.

“But that’s no good for investors,” Johnson acknowledged, “because they want to know what the Fed is going to do.”

In other market highlights:

* Oil futures rose $1.19 to $73.32 a barrel, climbing back toward the record of $75.17 on April 21, amid new concerns of supply disruptions after the killing and kidnapping of foreign oil workers in Nigeria. Exxon Mobil fell 42 cents to $63.46 and Occidental Petroleum lost 88 cents to $106.25.

* Gold futures soared $16.10 to $719.80 an ounce, a new 25-year high. Gold is traditionally a hedge against inflation. Among gold-mining stocks, however, Newmont Mining declined 17 cents to $58.13 and Barrick Gold fell 76 cents to $34.47.

* The dollar strengthened against the yen but fell against the euro, which rose to $1.284, from $1.279 on Wednesday. The yield on the 10-year U.S. Treasury note was unchanged at 5.13%.

* Retailers fell amid disappointing April sales numbers and concerns that rising fuel costs would crimp consumer spending. Sales rose 0.5% last month, while economists expected an increase of 0.8%. Wal-Mart Stores lost 53 cents to $47.25 and Target gave up 57 cents to $53.42.

* Shares of the interest-rate-sensitive banking and finance sectors were lower. Citigroup fell 82 cents to $49.48, Wells Fargo dropped 47 cents to $67.48, Merrill Lynch gave up $2.51 to $74 and Lehman Bros. sank $2.36 to $71.77.

* Homebuilders, also sensitive to interest rate hikes, posted sharp losses. KB Home dropped $1.44 to $59.44, Pulte Homes sank $1.59 to $34.99 and Lennar fell $1.79 to $51.20.

* American International Group led a retreat in insurance stocks after missing its earnings forecast. AIG slid $3.39 to $63.15. MetLife gave up 39 cents to $52.80 and Hartford Financial Services lost 52 cents to $91.70.