Stocks slide, day 2

NEW YORK (CNNMoney.com) -- Stocks slumped Wednesday, falling for a second session as worries about inflation, the housing market and rising interest rates gave investors a reason to bail out after the recent rally.

The Dow Jones industrial average (down 129.79 to 13,465.67, Charts) lost almost 130 points, or just short of 1 percent. The broader S&P 500 index (down 13.57 to 1,517.38, Charts) and the tech-driven Nasdaq composite (down 24.05 to 2,587.18, Charts) both lost about 0.9 percent.

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The Russell 2000 (down 7.04 to 841.21, Charts) small-cap index slumped 0.8 percent.

Treasury prices rose, lowering the corresponding yields, and the dollar was mixed versus other major currencies. Oil prices rose, and gold prices slipped.

Stocks have fallen for two sessions as investors have weighed cautious comments from Federal Reserve officials, rising interest rates at home and abroad and signs that inflation is not moderating, even while the housing market continues to drag on the economy.

All of these signals have led to worries that the Federal Reserve will have to raise rather than lower interest rates, as investors were hoping to see later this year.

"I think investors are catching up to some of the negatives that have been in the market for a while and that's giving them a reason to take a little money off the table," said Peter Cardillo, chief market economist at Avalon Partners.

However, a pullback was not surprising considering the recent run. The Dow and S&P 500 have risen in eight of the past nine weeks, and all three major gauges have posted monthly gains in March, April and May.

"We're seeing the same concerns about slowing growth and earnings we've been seeing, and concerns about interest rates rising," said Charles Smith, chief investment officer at Fort Pitt Capital Group. "Put that all together and you are going to see a pullback, especially after eight or ten weeks of gains."

Over the two-day period, the decline has been relatively small. The Dow has lost 1.5 percent, the S&P 500 has lost 1.4 percent and the Nasdaq has lost 1.1 percent.

Cardillo said the major gauges could end up giving up another 2 percent to 4 percent each over the next few weeks before stabilizing and eventually recovering.

Both analysts said they thought the decline Tuesday and Wednesday was pretty slim in the context of the broader run-up and didn't spell doom and gloom for the rally longer term.

Thursday brings the April wholesale inventories report in the morning and an earnings report from National Semiconductor (down $0.25 to $26.31, Charts) after the close.

The European Central Bank raised interest rates by a quarter percentage point, as expected, to temper inflationary pressures in the expanding economy. That sent European stocks tumbling, which also dragged on U.S. stocks.

U.S. investors were also sorting through the revised first-quarter productivity report. Productivity rose 1 percent, as expected, versus initial reports of a rise of 1.7 percent. However, unit labor costs, the report's inflation component, rose 1.8 percent versus the initially reported rise of 0.6 percent.

Additionally, investors reacted to a pair of Fed speakers one day after Chairman Ben Bernanke said that there is a risk inflationary pressures won't ease as expected.

On Wednesday, Richmond Federal Reserve Bank President Jeffrey Lacker said in a speech that it is not clear whether so-called core inflation is moderating. Core inflation strips out volatile food and energy prices.

Cleveland Fed President Sandra Pianalto said in a speech that the long-term inflation trend remains too high.

Neither Lacker nor Pianalto are voting members of the Fed's policy committee this year.

The day's concerns weren't limited to inflation.

An industry trade group put a damper on any hopes that the outlook for home prices or the pace of existing home sales might improve this year. The National Association of Realtors cut its sales forecast for the fourth month in a row and also boosted the speed at which it expects prices will drop.

Stock declines were broad based, with 25 out of 30 Dow issues falling, led by Alcoa (down $0.74 to $39.85, Charts, Fortune 500), IBM (down $3.43 to $102.41, Charts, Fortune 500), Intel (down $0.47 to $21.49, Charts, Fortune 500), DuPont (down $1.26 to $50.98, Charts, Fortune 500), Pfizer (down $0.49 to $26.79, Charts, Fortune 500) and American Express (down $1.05 to $63.74, Charts, Fortune 500).

Among the standouts, Pfizer slipped after the Supreme Court rejected the company's emergency appeal to delay generic drug companies from being allowed to sell an alternate version of Norvasc, its blockbuster treatment for hypertension.

Component Exxon Mobil (down $0.64 to $83.62, Charts, Fortune 500) was one of a number of oil services stocks slipping. Metal and mining stocks and other commodities fell on the session, too.

The Dow Jones Transportation (down 92.56 to 5,158.98, Charts) average slumped 1.8 percent after UBS cut its earnings estimates on several railroad stocks, according to Briefing.com. Companies mentioned included Burlington Northern Santa Fe (down $2.41 to $90.49, Charts, Fortune 500) and Union Pacific (down $2.82 to $118.16, Charts, Fortune 500).

Panera Bread (down $8.04 to $50.28, Charts) slumped almost 14 percent in unusually active Nasdaq trading after the restaurant chain warned that second-quarter earnings won't meet estimates because of pressures on its margins, a key measure of profitability.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 4 to 1 on volume of 1.55 billion shares. On the Nasdaq, decliners beat advancers by more than 2 to 1 on volume of 2.14 billion shares.

Treasury prices inched higher, lowering the yield on the 10-year note to 4.96 percent from 4.99 percent late Tuesday. Bond prices and yields move in opposite directions. Investors are keeping an eye on 5.0 percent, a key psychological level that the 10-year note yield has not surpassed yet this year.

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

U.S. light crude oil for July delivery settled up 35 cents to $65.96 a barrel on the New York Mercantile Exchange after the weekly inventories report showed a jump in gas supplies and a surprise fall in refinery activity, while a cyclone batters the Persian Gulf.

COMEX gold for July delivery fell 50 cents to settle at $674.60 an ounce.