NEW YORK (CNN/Money) -
Stocks tumbled late in Tuesday's session after Fed Chairman Alan Greenspan said deflation was dead, remarks that investors took as a hint that the central bank will start raising rates sooner than Wall Street had expected.
Stocks were modestly lower in mid-afternoon trading until the central bank chairman began speaking to Congress late in the session.
After Greenspan's remarks hit trading screens, the Nasdaq composite (down 41.80 to 1978.63, Charts) promptly sank 2.1 percent.
The Standard & Poor's 500 (down 17.67 to 1118.15, Charts) index lost about 1.6 percent and the Dow Jones industrial average (down 123.35 to 10314.50, Charts) fell 1.2 percent.
Treasury bonds turned lower on Greenspan's comments as well.
Greenspan, speaking before the Senate Banking Committee, first said that banks are already prepared for higher interest rates, then said in response to questions from lawmakers that deflation was no longer an issue, that corporate pricing power is returning and that economic news improved in March. All of which investors interpreted as the clearest sign yet that the central bank was moving toward raising short-term rates
"If you take all those comments together, it implies the Fed is less worried about deflation and more about inflation, all of which sets the stage for higher rates," said Michael Sheldon, chief market strategist at Spencer Clarke.
Greenspan is due to testify before the Joint Economic Committee of Congress Wednesday and could address the economy and interest rates more directly then.
Stocks treaded water for most of Monday's session but found some momentum in late trading as tech buying lifted the Nasdaq and helped the Dow and S&P 500 erase most of their losses.
That momentum carried over early Tuesday, boosted by positive earnings from companies such as General Motors, but the upward push got crushed as Greenspan's comments, and rate worries, took over.
"Everything's coming in really strong on the earnings front, across a number of sectors, but the market doesn't seem to be responding to it." said Robert Long, vice president of investments at Melhado, Flynn & Associates. "I think it's just a bit of 'sell the news' in terms of a lot of these earnings."
After the close of trade, Motorola (MOT: Research, Estimates) posted a higher-than-expected quarterly profit and forecast higher second-quarter results, as it boosted its share of the global handset market. Its stock soared 24 percent in after-hours trading.
But that was something of an anomaly.
"I think the last few weeks have probably been frustrating for investors," Sheldon added. "Earnings have been very positive, but the focus has been on interest rates. Over the next few sessions, it looks like the fear of higher interest rates will probably outweigh the earnings."
Earnings are due Wednesday morning from a variety of companies, including Dow components' Coca-Cola (KO: Research, Estimates), Honeywell (HON: Research, Estimates), United Technologies (UTX: Research, Estimates), JP Morgan Chase (JPM: Research, Estimates) and SBC Communications (SBC: Research, Estimates). (For a look at the week's biggest earnings and why they matter, click here.)
What moved?
One of the few companies to report earnings and see its stock benefit was General Motors (GM: up $1.62 to $47.77, Research, Estimates), which rose 3.5 percent after it reported earnings of $2.25 a share, up from $1.85 a year earlier and well above analysts' forecasts.
GM, one of 30 stocks in the Dow industrials, also boosted 2004 earnings guidance. The good cheer spread to competitor Ford Motor (F: up $0.21 to $13.56, Research, Estimates), which added 1.6 percent in active trade.
GM was one of only two Dow components that rose Tuesday.
Some other companies that reported improved earnings saw their stocks sink, even before Greenspan began speaking.
Another Dow component, Altria Group (MO: down $0.12 to $56.33, Research, Estimates), reported earnings of $1.16 per share, 3 cents more than expected, but little changed from a year ago. Its shares closed little changed.
In its first earnings report as a Dow component, Pfizer (PFE: down $0.88 to $36.70, Research, Estimates) said it made a profit of 52 cents a share, a penny more than expected and up from 41 cents a year earlier. But its stock sank about 2 percent.
Shares of Lucent Technologies (LU: down $0.44 to $3.89, Research, Estimates) fell 10 percent and topped the NYSE's most-actives list after the company reported earnings that grew from a year earlier and edged past estimates.
Among other movers, Taser International (TASR: down $34.31 to $84.39, Research, Estimates) tumbled 29 percent after the company reported earnings and sales that rose from a year earlier and beat estimates, as investors took profits. The stock has more than quadrupled this year.
Due to heightened geopolitical tensions, Taser and other makers of products used in security have seen their shares zoom this year, even as the broader market has been more mixed.
Among other movers, big-cap techs fell across the board, including Cisco Systems (CSCO: down $0.75 to $22.11, Research, Estimates), Intel (INTC: down $0.61 to $26.07, Research, Estimates) and Oracle (ORCL: down $0.32 to $12.00, Research, Estimates).
Market breadth was negative. On the New York Stock Exchange, some 1.51 billion shares changed hands and on the Nasdaq, close to 2 billion shares traded. On the NYSE, losers beat winners by almost four to three, while on the Nasdaq, decliners beat advancers by eleven to five.
Treasury prices fell. The 10-year note lost 18/32 of a point in price, pushing its yield up to 4.45 percent from 4.38 percent late Monday. Bond prices and yields move in opposite directions.
The dollar gained versus the euro and declined versus the yen.
Among commodities markets, NYMEX light sweet crude oil futures fell 25 cents to settle at $36.50 a barrel, recovering from steeper losses. COMEX gold fell $2.90 to settle at $398.30 an ounce.
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