Stocks Head South on Yield Jitters

Updated from 4:08 p.m. EST

Stocks took a post-holiday dive Tuesday as concern over an inverting yield curve was exacerbated by thin volume. Broad weakness in energy stocks also hurt the blue-chip averages.

The Dow Jones Industrial Average lost 105.50 points, or 0.97%, to 10,777.77, after trading as high as 10,932 earlier. The Dow closed below its break-even point for 2005. The S&P 500 fell 12.12 points, or 0.96%, to 1256.54. The Nasdaq Composite sank 22.53 points, or 1%, to 2226.89.

"It was unanimous we'd have a year-end rally until the yield curve inverted," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "We wanted to close the market on a high note this year, but now we're worried that the 2006 market will have to deal with this. The next Federal Reserve meeting will be extremely critical. We have to hope this isn't predictive of a recession or a slowing economy."

The 10-year Treasury bond rose 9/32 in price to yield 4.34%, even with the yield of the two-year note. The dollar rose against the yen and fell against the euro. Yields on the two- and 10-year notes briefly converged earlier, a phenomenon that some economists believe portends recession.

"There was a sense that a year-end rally would take us higher, but there's some concern from the bond market flattening," said Jay Suskind, head of institutional equity trading with Ryan Beck & Co. "The inverting of the yield curve would bring us more problems in 2006. We also have light volume, exaggerating moves to both sides."

An inverted yield curve bucks the normal tendency of interest rates on longer-term bonds to exceed short-term ones. It can be read as a harbinger of economic malaise by suggesting banks will have fewer lending opportunities in the future. A less-depressing interpretation is that the market believes the Fed is done raising short-term rates.

"The inverted yield curve has some historical significance as an indicator, as far as a connection to the global economy," said Richard Hastings, retail analyst with Bernard Sands. "You're going to see material impact on the economy. That is what is spooking people."

About 1.15 billion shares traded on the New York Stock Exchange, with decliners beat advancers by a 2-to-1 margin. Trading volume on the Nasdaq was 1.26 billion shares, with decliners outpacing advancers 3 to 2.

Crude oil continued to ease as bullish energy traders stood pat after a profitable 2005. In Nymex floor trading, crude for February delivery fell 27 cents to close at $58.16 a barrel. Natural gas futures slid $1.26 to $11.02 per million British thermal units. Among large-cap names, Exxon MobilXOM fell 2.2% to $55.87; Chesapeake EnergyCHK lost 4.6% to $30.68; Diamond OffshoreDO lost 3.6% to $68.76; and ValeroVLO shed 3.7% to $50.90.