NEW YORK (CNNMoney.com) - Stocks continued their retreat Tuesday, amid continued investor concern about interest rates, despite a late-session rebound that kept the Dow Jones industrial average barely above 11,000 at the close.
The 30-stock Dow (down 56.27 to 10,992.45, Charts), the world's most widely watched stock market gauge, spent most of the latter part of the session below the key psychological 11,000 level as investors braced for what they expect will be another Federal Reserve rate hike later this month.
The Dow has now tumbled nearly 650 points, or 5.5 percent, since coming within 80 points of its all-time high on May 10, as concerns about inflation and the interest rate outlook have unnerved investors.
The Standard & Poor's 500 index (down 1.57 to 1,263.72, Charts) and the Nasdaq composite (down 6.85 to 2,162.77, Charts) posted modest losses, after being much lower earlier in the session.
With no economic reports on tap to offer direction Tuesday, investors focused on comments from a number of Fed officials, who talked tough on inflation a day after Fed Chairman Ben Bernanke made similar comments to a bankers' conference in Washington.
The effect was clear: investors now are betting there's a much greater chance the Fed will raise its short-term rate target for a 17th straight time when the central bank's policy-makers meet on June 28-29.
Rate futures on the Chicago Board of Trade show investors are now betting on an 80 percent chance the central bank will raise rates then, up from 42 percent late Friday.
"The market is bracing for another rate hike. But more than that, there's the fear the rate hiking cycle won't end in June," said Eugene Peroni, senior managing director at Claymore Advisors.
Uncertainty surrounding rates has pressured stocks since May 10, the day of the last Fed meeting, when the central bank policy-makers offered no clear sign of what investors can expect in coming months.
Higher rates hurt stocks since they weigh on corporate earnings and make other investments, like cash, more attractive.
What moved?
Among Dow stocks, 18 fell and 12 rose. Economically sensitive issues like Alcoa (down $0.64 to $30.74, Research) and Boeing (down $1.57 to $80.56, Research), and United Technologies (down $1.41 to $60.04, Research) led the declines.
But consumer staple shares, including Johnson and Johnson (up $0.75 to $60.88, Research) and Kimberly Clark (up $0.31 to $60.28, Research), gained.
Stocks in the interest-rate sensitive housing sector remained under pressure. The Dow Jones U.S. Home Construction index tumbled 3.9 percent, after sinking 5 percent Monday.
Fed in focus
The latest round of Fed speak echoes warnings Bernanke made Monday about inflation running uncomfortably high even as the economy starts to slow. (Full comments.)
Fed Governor Susan Bies said Tuesday that given the recent high readings on inflation and expectations for slower economic growth ahead, the central bank can't say when it will be finished raising rates. (Full story.)
St. Louis Federal Reserve President William Poole said in an interview published in the Wall Street Journal Tuesday that a slowing economy may not reduce inflation. (Full story.)
Bernanke's statements stoked fears that rates are headed higher and sent the Dow skidding to its third-biggest point and percentage loss of the year Monday. The Nasdaq and S&P 500 turned in their second-worst performances for 2006.
"The market has been hanging on every utterance from a Fed official about the likely course of events on June 29," said Ken Mayland, president of ClearView Economics, a firm
specializing in economic research and forecasting.
