Killjoys on Wall Street

NEW YORK (CNNMoney.com) -- Stocks tumbled Tuesday, as rising Treasury yields, a cautious Federal Reserve chief and a strong reading on the services sector revived worries that the central bank could raise interest rates later this year.

The Dow Jones industrial average (down 80.86 to 13,595.46, Charts) lost 0.6 percent. The blue-chip barometer ended the previous session at an all-time high, its third in the past four sessions.

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The broader S&P 500 index (down 8.23 to 1,530.95, Charts) lost 0.5 percent after ending the previous session at an all-time high for the fourth time in a row.

The Nasdaq composite (down 7.06 to 2,611.23, Charts) gave up 0.3 percent. The tech-fueled index ended the previous session at a new six-year high.

The Russell 2000 (down 6.84 to 848.25, Charts) small-cap index lost 0.8 percent, after ending at an all-time high in the previous session.

Treasury prices slipped, boosting the corresponding yields, with the benchmark 10-year note yield ending at a 2007 high of 4.99 percent. Investors have been watching the 5 percent level as a key psychological barrier.

Oil and gold prices declined. The dollar slipped versus other major currencies.

The stock selloff was sparked by two main factors Tuesday, said Ted Weisberg, New York Stock Exchange floor trader at Seaport Securities.

"No. 1, the market's been basically on a straight line since the selloff at the end of February, start of March, and so we were certainly due for a correction," he said.

The Dow and S&P 500 have now risen for 8 of the last 9 weeks as investors have welcomed better-than-expected earnings, solid economic growth and lots of merger and acquisition news.

The second factor, Weisberg said, is that despite signs that inflationary pressures remain, the market psychology has been that the Federal Reserve will cut interest rates before raising them.

As a result, "every time we get news that indicates the economy is stronger than we have been led to believe, the prospect of that rate cut disappears and the sentiment switches to the possibility of higher rates," he said.

And when that happens, investors get a little nervous, which seemed to be the case Tuesday following Bernanke's comments and the strong May ISM report.

Wednesday brings the weekly oil inventories report and the first-quarter reading on productivity, but neither are likely to be big stock market movers.

Bernanke, who spoke via satellite Tuesday morning to a conference in Cape Town, South Africa, said that there is a risk inflationary pressures won't ease as the weakness in the housing market is likely to drag on the economy more than has been expected.

Bernanke also said he expects economic growth to be close to or slightly below trend and that the spillover from the subprime mortgage collapse is likely to be limited. However, investors focused on the more negative aspects of his testimony and sent stocks lower.

Additionally, the Institute for Supply Management said its May services sector index rose to 59.7 from 56 in April. Economists surveyed by Briefing.com thought it would fall to 55.5.

"I don't think the market reaction was as much to Bernanke, who didn't really say anything new, as to the ISM, which was much stronger than everyone expected," said Stuart Hoffman, chief economist at PNC Financial Services Group.

He said that although the ISM services sector report is not typically a big market mover, it was on Tuesday because it follows recent strong reports on manufacturing and the labor market.

"It fits a pattern of other recent reports that say economic growth improved in April and seems to be building on that growth in May," Hoffman said.

The concern is that the growth will either become inflationary or force the Federal Reserve to boost interest rates later this year.

Stock declines covered many sectors, with 27 out of 30 Dow components falling, led by DuPont (down $0.95 to $52.24, Charts, Fortune 500). The chemical maker was downgraded by Lehman Brothers, according to Briefing.com.

Other Dow decliners included Walt Disney (down $0.43 to $35.27, Charts, Fortune 500), Home Depot (down $0.72 to $38.86, Charts, Fortune 500), Wal-Mart Stores (down $0.69 to $50.52, Charts, Fortune 500) and Altria (down $1.12 to $70.68, Charts, Fortune 500).

In deal news, Avaya (up $0.31 to $17.03, Charts, Fortune 500) agreed to an $8.2 billion buyout from TPG Capital and Silver Lake Partners, two private equity firms. Shares of the telecom gear maker inched higher in active New York Stock Exchange trade.

Dow Jones (up $0.34 to $60.50, Charts) shares gained modestly after reports said that the publisher may receive an alternate bid from billionaire investor Ron Burkle. The Wall Street Journal owner is already in discussions with Rupert Murdoch, whose News Corp. (up $0.05 to $24.15, Charts, Fortune 500) has bid $5 billion for the company.

In other news, Openwave Systems (down $1.65 to $8.72, Charts) said late Monday that its board rejected a hostile $335 million bid from Harbinger Capital Partners to take a controlling stake in the company. Investor group Harbinger already owns 13 percent of the company's shares.

Openwave, a telecom software maker, slumped almost 16 percent in active Nasdaq trade on Tuesday.

Amazon.com (up $3.23 to $73.65, Charts, Fortune 500) jumped 4.6 percent after the online retailer said it would expand its business in China, according to media reports.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 3 to 1 on volume of 1.51 billion shares. On the Nasdaq, decliners topped advancers by over 3 to 2 on volume of 2.22 billion shares.

Treasury prices slipped, raising the yield on the 10-year note to 4.99 percent from 4.92 percent late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and the yen.

U.S. light crude oil for July delivery fell 62 cents to $65.59 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery fell $1.20 to settle at $675.10 an ounce.