NEW YORK (CNN/Money) -
Stocks tumbled for a second straight session Monday on worries that interest rates will rise soon, pushing the Dow Jones industrial average below 10,000 for the first time since December.
Treasury bond prices were mixed and the dollar kept climbing. Oil prices fell.
Higher rates -- widely expected to come sooner rather than later as the Federal Reserve seeks to ward off inflation -- could hurt corporate profits and thus stock valuations.
The 30-share Dow (down 127.30 to 9990.02, Charts), the world's most widely watched stock market gauge, sank 1.26 percent, closing below 10,000 for the first time since Dec. 10, 2003.
The Standard & Poor's 500 (down 11.50 to 1087.12, Charts) index lost just more than 1 percent, hitting a new low for the year, and closed at its lowest level since December 17.
The Nasdaq composite (down 21.80 to 1896.07, Charts) lost about 1.1 percent, also a new 2004 low, and was at its lowest close since Nov. 21 of last year.
"Even just a month ago, prior to the release of the March payrolls number, there were some investors betting that rates wouldn't rise until early next year," said John Davidson, president and CEO at PartnersRe Asset Management. "Now, after two months of higher payrolls, it seems likely rates are set to rise, and so there's a certain throwing in of the towel for some investors."
Worries about when interest rates will rise and by how much had kept stock markets rangebound for weeks and sent them lower last week, when the Fed hinted rates would rise but did not give a timeline. For many investors, Friday's much stronger-than-expected monthly employment report provided that timeline.
Following the report, investors began to speculate that rates could rise as soon as at the Fed's meeting in late June. Until last week, most on Wall Street had been convinced that if rates were to rise, this would happen in August at the earliest.
"Rising rates is the excuse," said John Hughes, market analyst at Shields & Co. "Genuinely, there is worry about the impact of rising rates, because maybe people didn't think that they would rise so quickly, but that fear begins to feed on itself."
Traditionally, stock markets dislike rising rates because of worries that a higher rate environment would slow economic growth and dent corporate profits, eventually hurting stock valuations.
"Earnings have been strong and will continue to be strong, but there's a worry that rising rates will mean the multiple on the earnings will be less," Davidson added.
Stocks and sectors bound to suffer in a rising interest rate environment continued to lead the declines Monday. A midday attempt at a semiconductor recovery petered out, with the sector turning flat, and the market's declines accelerated into the close.
Also weighing on investor sentiment were the ongoing events in Iraq -- in particular, the continued fallout from the abuse of Iraqi detainees.
Many of these same concerns are likely to weigh on stock markets during Tuesday's session. After the close Tuesday, tech leader Cisco Systems is due to report results. (For a look at this and other earnings due this week, click here.)
Oil, banks, and other movers
Worries about rates overshadowed some otherwise positive developments, including a slide in oil prices from more than 13-year highs after Saudi Arabia's oil minister asked for OPEC to raise supply limits. The action sent NYMEX light sweet crude oil futures down $1 to settle at $38.93 a barrel.
The pullback in oil pressured a number of oil stocks, including Dow component Exxon Mobil (XOM: down $1.20 to $42.05, Research, Estimates), which lost nearly 2.8 percent. The Philadelphia Oil services (down 3.00 to 95.84, Charts) index lost more than 3 percent.
Financial stocks were among the most active following some specific corporate news and because of the sector's sensitivity to interest rate movements.
"A lot of these financial stocks, people ran them so hard because they expected rates would stay lower for nine more months, and now they're taking some profits," Hughes added. "You're seeing the banks, the REITs, others getting hit hard today."
Citigroup (C: down $1.31 to $45.41, Research, Estimates) agreed to pay $2.65 billion to settle a class-action suit brought against it by WorldCom shareholders who claimed that the bank had been involved in the massive fraud at the phone company.
WorldCom emerged from bankruptcy and is now called MCI. The charge is part of a broader $4.95 billion after-tax charge that Citigroup will take in its fiscal second-quarter. The news sent the stock down 2.8 percent.
Fellow Dow financial J.P. Morgan Chase (JPM: down $1.07 to $35.41, Research, Estimates) also lost nearly 3 percent. Following the Citigroup news, Prudential Securities downgraded J.P. Morgan to "neutral" from "overweight," arguing that the investment bank will need to increase its litigation reserve so as to cover both WorldCom and Enron-related charges. The brokerage also cited the impact of higher interest rates on profits.
In other news, SunTrust Banks (STI: down $5.08 to $61.80, Research, Estimates) said it would buy National Commerce Financial (NCF: down $0.70 to $31.10, Research, Estimates) for almost $7 billion in cash and stock. The stocks fell 7.6 percent and 2.2 percent, respectively.
Of the 30 components that comprise the Dow industrials, 24 fell. The Dow's biggest loser was Caterpillar (CAT: down $4.24 to $72.88, Research, Estimates), down 5.5 percent.
Market breadth was decidedly negative. On the New York Stock Exchange, where 1.9 billion shares traded, decliners outnumbered advancers by more than nine to one. On the Nasdaq, this ratio came in at more than three to one on volume of 1.88 billion shares.
Treasury prices edged lower. The 10-year note lost 4/32 of a point, pushing its yield up to 4.79 percent, from 4.77 percent late Friday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar rallied versus the yen and euro.
COMEX gold fell 40 cents to settle at $378.70 an ounce, having recovered from steeper losses in the morning.
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