Market pulls back on economic caution

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By Hope Yen
Associated Press

NEW YORK — Wall Street retreated today after Federal Reserve chairman Alan Greenspan said the economy should post stronger growth by year's end but cautioned that the threat of deflation remains.

Analysts said some investors feared Greenspan's remarks might signal a return to higher interest rates, while others decided the best bet in any event was to cash in profits after several months of stock gains.

"Even though Greenspan said he'll keep rates as low as he can, his comments were fairly bullish, suggesting an end (to rate cuts)," said Russ Koesterich, U.S. equity strategist at State Street Corp. "There's a lot of sensitivity to higher rates."

"The market is also running into resistance at the 1,000-1,010 level" on the Standard & Poor's 500 index, he added. "It's been an obstacle for the market, going back a month."

The Dow Jones industrial average closed down 48.18, or 0.5 percent, at 9,128.97, wiping out most of yesterday's 57-point gain.

The broader market also finished lower. The Nasdaq composite index slipped 1.54, or 0.1 percent, to 1,753.28. The S&P 500 fell 3.44, or 0.3 percent, to 1,000.42.

Greenspan told a House panel today the Fed is prepared to cut rates again if necessary to stave off a destabilizing fall in prices, a threat he called remote.

The Fed also predicted a stronger recovery in the second half of the year and a jump in economic growth in 2004, citing low interest rates and President Bush's tax cuts.

A pair of better-than-expected economic reports, meanwhile, failed to lift the market.

The Commerce Department reported the nation's retail sales rose by 0.5 percent in June. It was the best showing in three months and beat the 0.4 percent gain analysts were expecting.

And the New York Federal Reserve's Empire State manufacturing survey fell to 22.6 in July compared to 27.6 the previous month; still, the reading was higher than Wall Street's estimates. Some analysts believe the survey offers an indication of national manufacturing performance.

After several months of rallies, investors are also scrutinizing the second-quarter earnings season for proof the economic recovery is firmly under way. Many analysts believe the market can see additional gains based on the results.

"I think the expectation level for earnings is very reasonable," said Stephen Massocca, president of Pacific Growth Equities. "Earnings will by and large meet and exceed estimates, which bodes well for the market."

Decliners included Dow component Altria Group, which dropped $1.46 to $40.50 after an Illinois appellate court said a lower court lacked authority when it reduced the size of the bond the company's Philip Morris unit had to post to appeal a $10.1 billion tobacco verdict; the case was sent back to the lower court.

But Merrill Lynch climbed $2.39 to $53.80 after the largest brokerage firm reported quarterly earnings that handily beat Wall Street's estimates.

Declining issues outnumbered advancers 2 to 1 on the New York Stock Exchange. Volume was moderate.