Stocks ended mostly lower on Monday, as investors increasingly came to believe that that the Federal Reserve will hold off on cutting interest rates at its policy meeting on Tuesday. However, the Nasdaq managed to eke out a tiny gain.
Stocks had enjoyed robust gains in previous sessions based on hopes for an easing by the central bank.
The Fed is in something of a dilemma. If it leaves the cost of borrowing alone, as expected, some Wall Streeters argue it could forestall the economic recovery. But if the central bank lowers the federal funds rate, it runs the risk of sending a signal that the economy is truly in distress.
The Dow Jones industrial average eased 56.76 points, or 0.65%, to 8,688.69. And the broader Standard & Poor's 500-stock index gave up 4.86 points, or 0.53%, to 903.78. But the tech-heavy Nasdaq composite index inched up 0.59 of a point, or 0.05%, to 1,306.71.
Tuesday will provide some direction for the market. Most economists are betting that Alan Greenspan & Co. will keep interest rates unchanged. "The Fed does not have enough evidence of weakness to justify a rate cut, nor enough evidence of inflation to raise rates," wrote Standard & Poor's chief economist David Wyss in a report Friday.
In addition to the Fed meeting, investors will also be watching for the release of July retail sales figures. MMS is calling for a 1.2% gain for July, which is slightly ahead of the median expectation of forecasters. Excluding autos, however, a more modest rise of 0.4% is pencilled in.
Tuesday will also be a big day on the earnings front, with profit reports due from a trio of important retailers: Wal-Mart Stores (WMT), the world's No. 1 retailer, department store giant JC Penney (JCP), and luxury goods outfit Tiffany (TIF).
On the technology side, companies scheduled to release results include semiconductor equipment maker Applied Materials (AMAT) and data storage company Network Appliance (NTAP).
On Monday, interest rate sensitive financial stocks were trading lower ahead of the meeting of the Fed's rate-setting committee.
Adding to Monday's uncertainty was a Chapter 11 bankruptcy filing by US Airways (U), which became the first major carrier to ask for protection since the September 11 terrorist attacks.
United Airlines parent UAL (UAL) was trading lower as some on Wall Street fear the carrier also has a high cost structure and is in a tough financial position.
In other corporate news, May Department Stores (MAY), the name behind the Lord & Taylor and Filene's chains, posted lower quarterly earnings as U.S. it faced strong competition from discounters.
But there was also cause for some optimism. Discount-store king Wal-Mart said it sees sales at stores open at least a year to increasing 4% to 6% this month because of robust back to school sales and other factors.
Billionaire investor Warren Buffett's holding company Berkshire Hathaway (BRKA) posted 35% higher quarterly profits thanks to rising premiums in its insurance operations.
Treasuries ended higher in price on the weakness in equities, with the 30-year bond showing particular strength. A U.S. National Assn. of Business Economists poll suggests that the Fed's previous rate cuts should be sufficient to prevent a relapse into recession, MMS says. And the economists polled don't look for any changes in Fed policy over the next six months. More than 75% of those contacted believe policy is "about right," with 57% saying the Fed should not cut rates, MMS says. Some 69% said the odds of a double dip were less than 50-50.
European markets finished lower amid economic uncertainty. In London, the FTSE 100 index lost 100.80 points, or 2.33%, to 4,221.60.
In France, the CAC 40 was off 83.50 points, or 2.42%, to 3,364.44.
And in Germany, the DAX Index gave 113.73 points, or 3.02%, to 3647.13.
Most other European markets were down as well.
In Asia, the markets finished lower. In Japan, the Nikkei dropped 251.97 points, or 2.52%, to close at 9,747.82 mainly due to poor sentiment toward the bellwether U.S. economy and U.S. dollar weakness.
In Hong Kong, the market gave up 54.14 points, or 0.54%, to 9,959.92.