- The Washington Times - Tuesday, April 13, 2004

NEW YORK (AP) — Wall Street took a sharp downward turn yesterday as investors interpreted a big jump in retail sales as a harbinger of an earlier-than-expected rise in interest rates. The Dow Jones Industrial Average gave up early gains, falling more than 130 points by the close.

The sell-off was spurred by the Commerce Department’s report of a 1.8 percent increase in retail sales for March, the biggest jump in a year. It was three times greater than the 0.6 percent rise economists expected.

That raised the specter of inflation, and investors worried that the Federal Reserve would raise interest rates soon to keep the economy from growing too fast. A increase before year’s end could put President Bush’s re-election into question, according to Hugh Johnson, chief investment officer at First Albany Corp.

“That worries investors that we’re going to see a Democratic administration, which might roll back the 15 percent tax rate on capital gains and dividends,” Mr. Johnson said. “It’s a whole string of dominoes. If this weren’t an election year, you’d see earnings and economics outweigh the interest rate concerns.”

While the retail data helped the markets open higher, the major indexes quickly slipped into negative territory and fell sharply in afternoon trading. The Dow was off 134.28, or 1.3 percent, at 10,381.28. It was the biggest one-day drop for the Dow since March 25.

Broader stock indicators also dropped. The Standard & Poor’s 500 Index was down 15.76, or 1.4 percent, at 1,129.44, also the worst point loss since March 25.

The Nasdaq Composite Index fell 35.40, or 1.7 percent, to 2,030.08, the Nasdaq’s biggest loss since April 2.

The selling was broad, with every major sector losing ground, because rising interest rates could make borrowing difficult for most companies. But Stuart Freeman, chief equity strategist for A.G. Edwards & Sons, said there’s still a chance the Fed might hold off on a rate increase until the end of the year.

“I think the Fed will want to see more than one really strong employment number and maybe a few more numbers like this retail figure before they move,” Mr. Freeman said, alluding to the 308,000 jobs created in March. “It increases the likelihood that they could do something before the end of the year, maybe a modest move this summer, but they may also wait until after the election.”

In the meantime, with earnings season under way, health care products maker Johnson & Johnson and investment firm Merrill Lynch & Co., two closely watched stocks, both surpassed Wall Street estimates in announcements before the start of trading.

Strong sales and favorable exchange rates spurred a 20 percent increase in profits at Johnson & Johnson, which beat estimates by 3 cents per share and gained 19 cents to $51.39. Merrill Lynch, meanwhile, slumped $1.12 to $58.61 after posting record first-quarter earnings of $1.22 per share, beating analysts’ expectations by 15 cents per share.

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