Stocks Tumble Amid Fed Rate Worries

NEW YORK – Stocks' decline accelerated Tuesday, dragged down by brokerage downgrades on Internet retailer Amazon.com (AMZN) and computer maker Dell (DELL) and after minutes from a December Federal Reserve meeting triggered investor worry about more rate increases.

The Dow Jones industrial average (search) was down 98.65 points, or 0.92 percent, to end at 10,630.78 and the Standard & Poor's 500 Index (search) was off 14.04 points, or 1.17 percent, at 1,188.04. The Nasdaq Composite Index (search) was down 44.29 points, or 2.06 percent, to finish at 2,107.86.

The minutes from the Federal Reserve Open Market Committee's (search) Dec. 14 meeting were released at 2 p.m. , and cited the recent depreciation of the dollar on foreign-exchange markets, high energy costs and the possible slowdown in productivity as factors tending to boost the upside risks to their inflation outlook.

Equity markets often come under pressure on the prospect of higher interest rates on concerns that it will push money out of stocks and into other investments.

"The comment by the Fed from the minutes that inflation may be a little bit stronger than thought implies higher rates in the short term," said Marc Pado, U.S. market strategist for Cantor Fitzgerald & Co.

"A lot of people thought that in the next meeting they would give a break and not raise rates. It was the last straw for the market," he said.

Adding to the pressure were a jump in crude oil prices. NYMEX crude oil for February delivery shot up $1.79, or 4.25 percent, to settle at $43.91. Oil prices rallied amid escalating violence in Iraq.

For bulls, the start of 2005 has not been auspicious. Since the last day of trading in 2004, the Nasdaq has fallen 3.1 percent and the Dow has slipped 1.4 percent. The Standard & Poor's 500 is down nearly 2 percent.

"The Fed's comments really turned a day of light profit-taking into a day of significant profit-taking," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "Clearly, the way the market started off the new year will make investors nervous, and that could feed on itself over the next few days and drive things even lower before it settles down."

Meanwhile Amazon.com (AMZN) dropped $2.38 to $42.12 on Nasdaq after Smith Barney cut its rating on the stock to "sell" from "hold," citing stiff competition from traditional retailers that are setting up their own online stores.

Dell (DELL) fell 3 percent, or $1.27, to $40.52 after Raymond James cut its rating on the computer maker to "outperform" from "strong buy." Traders said Dell's downgrade was hurting chip stocks too. Intel Corp. slipped 1 percent to $22.86.

"The Amazon call is weighing on the Nasdaq, while the downgrade of Dell is also hurting chip stocks," said Jim Fehrenbach, head of Nasdaq trading, Piper Jaffray. "I also think there were some people in the run up later in the year that didn't want to sell stocks and they are coming in to sell their holdings."

The dollar, having tumbled to record lows last month, showed signs of resilience, moving slightly higher against the euro and the Japanese yen. While the dollar is still at historical lows, benefitting exporters, signs of strength will help importers of raw materials as well.

Also on the positive side, Rayovac Corp. (ROV) announced the first major acquisition of 2005, a $476 million purchase of United Industries Corp. (search) , a privately held lawn care and pet supply company. The deal continues a growing trend of merger and acquisition activity since the postelection rally began.

Rayovac surged $5.09 to $34.65 on the news of its agreement with United Industries, which includes the assumption of $880 million in debt. The move will strengthen Rayovac's consumer products offerings and allow wider distribution of United Industries' products, analysts said.

Wall Street pushed automakers' stocks lower as they announced their December sales figures. Ford Motor Co. (F) fell 5 cents to $14.66 after it said last month's sales fell 3.6 percent and 2004 sales were down 4.9 percent. General Motors Corp. (GM) reported a 7 percent drop in December sales, and a 1.4 percent drop for the year, sending GM stock down 41 cents at $39.89. DaimlerChrysler AG (DCX) , despite an 11 percent surge in December sales and a 3 percent jump for the year, lost 26 cents to $47.42.

Krispy Kreme Doughnuts Inc. (KKD) fell as a shareholder lawsuit alleged the troubled doughnut maker frequently padded its sales figures by overshipping doughnuts to its wholesalers, knowing that many would be returned. Krispy Kreme, which said it plans to restate earnings for its past fiscal year, lost $1.80 to $10.48.

Apple Computer (AAPL) jumped 2.7 percent to $65 after JP Morgan raised its estimates for the computer maker, citing robust sales of its iPod digital music players and Mac personal computers through December.

Eastman Chemical Co. (EMN) said its fourth-quarter earnings will come in at the lower end of its previous forecasts due to high raw materials costs. Although the chemical company said its profit margins will improve in 2005, shares of Eastman tumbled $5.11 to $52.19.

The nation's industrial sector continues to gain traction, according to a new economic report. Factory orders were up 1.2 percent in November, the Commerce Department (search) said, better than the 1 percent gain economists had expected.

Trading was active, with 1.7 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 2.7 billion shares were traded on Nasdaq, well above the 1.81 billion daily average for 2004. The number of falling stocks outnumbered those on the rise by more than 3-to-1 on both the NYSE and on Nasdaq.

The Russell 2000 index of smaller companies was down 11.89, or 1.9 percent, at 628.55, its lowest level since Dec. 7.

Overseas, Japan's Nikkei stock average rose 0.25 percent. In Europe, Britain's FTSE 100 closed up 0.68 percent, France's CAC-40 climbed 0.2 percent for the session, and Germany's DAX index slipped 0.02 percent.

Reuters and the Associated Press contributed to this report.