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Price Pressures Gut Stocks

The Dow plunges 214 points amid signs of lingering inflation.

Updated from 4:05 p.m. EDT

Signs that inflation is seeping through to consumers convinced investors that the

Federal Reserve

must raise interest rates again and sent stocks to one of their worst sessions in three years on Wednesday.

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The

Dow Jones Industrial Average

fell 214.28 points, or 1.88%, to 11,205.61, its worst single-day point decline since March 2003. Of its 30 components, only

Hewlett-Packard

finished higher, while

Boeing

(BA) - Get Report

lost 3% and

GM

(GM) - Get Report

and

Alcoa

(AA) - Get Report

plunged 4% or more. Meanwhile, the

S&P 500

had its worst day since January, falling 21.77 points, or 1.68%, to 1270.31.

The

Nasdaq Composite

fell for the seventh straight session, plunging 33.33 points, or 1.5%, to 2195.80. The decline left the tech-heavy index in negative territory for the year.

Breadth was extremely negative. On the

New York Stock Exchange

, decliners outpaced advancers by a 14-to-3 margin on a volume of 2.09 billion. On the Nasdaq, decliners beat advancers 11 to 4 as 2.40 billion shares changed hands.

"Participants ignored a weak dollar,

rising long-term interest rates and higher commodity prices for too long, and they finally woke up today," said Phillip Roth, chief technical market analyst with Miller Tabak. "Everything is participating to the downside and this sentiment could hang around for a while."

Since the Dow came within 80 points of its all-time high last Wednesday, the index has lost roughly 3.7%. The Nasdaq has been hit harder over the same interval, giving up 5.4%, while the S&P 500 has fallen about 3.9%.

The 10-year Treasury bond fell 13/32 to yield 5.15%, while the dollar rose against the euro and erased early losses against the yen. Gold also reversed overnight gains. In stock, bond, currency and commodity markets, the price action reflected a growing belief that the Fed will raise the fed funds rate to 5.25% when it next meets in late June.

"There's reason for concern," said Michael Sheldon, chief market strategist with Spencer Clarke LLC. "The Fed may have to go further with its rate hikes than what most market participants have anticipated."

Fed fund futures reflected that, pricing in odds of a 25-basis-point hike on June 29 at 50%, up from 39% on Tuesday.

Investors hit the panic button after the release of the Labor Department's consumer price index for April. The index rose 0.6%, slightly ahead of expectations, while the core index, which excludes food and energy prices, rose a stronger-than-expected 0.3%.

The data, which follow a strong reading in the core deflator for personal consumption expenditures last month, swing the pendulum back toward hawks in the debate about the Federal Reserve's next interest rate move. Policymakers have said incoming economic reports are their primary focus in the run-up to the June 28 meeting.

To view Kara Wetzel's video take on today's market, click here

.

On Tuesday, a soft reading on core producer prices couldn't keep stocks aloft, as investors remained fixated on the future of Federal Reserve interest rate policy. For the session, the Dow lost 0.1% to 11,420, the S&P 500 lost 0.2% to 1292, and the Nasdaq fell 0.4% to 2229.

Selling was widespread among all sectors, with energy, gold, financials and transportation bearing the brunt. The Amex Gold Bugs index dropped 3%, the Dow Jones Transportation Average lost 2.7%, the NYSE Financial index fell 2.5% and the Philadelphia Oil Service Sector index was off 2.1%

Most commodities finished lower after a strong start. Gold futures, which traded up more than $20 early Wednesday, fell $1.10 to close at $691.80 an ounce. Copper fell 17 cents to $3.67 a pound and silver dropped 30 cents to $13.24 an ounce. In Nymex floor trading, June crude fell 84 cents to end at $68.69 a barrel, while gasoline was down 5 cents at $1.97 a gallon.

The Energy Department's weekly report on U.S. fuel inventories showed a 1.3 million-barrel rise in gasoline stocks, a 100,000-barrel gain in both crude stocks and distillate inventories.

"The commodities are moving again as a group, with investors taking profits off the table," said Art Hogan, chief market analyst with Jefferies. "The precious metals are mirroring what's happening in the equity market, forcing things down even further. Momentum is moving in one direction and it's very difficult to change or even slow it."

Resource stocks also finished lower.

Freeport McMoRan

(FCX) - Get Report

declined 6.1%,

BHP Billiton

(BHP) - Get Report

closed down 3.4% and

Newmont Mining

(NEM) - Get Report

was off 2.8%.

Shares of Hewlett-Packard finished up Wednesday after the hardware giant said second-quarter earnings rose 50% to $1.45 billion, or 51 cents a share, driven by strong sales of desktop and notebook computers. Adjusted earnings of 54 cents a share were a nickel better than expected. Sales of $22.6 billion essentially matched forecasts. H-P was higher by $1.05, or 3.4%, to close at $32.16.

Applied Materials

(AMAT) - Get Report

saw its shares ease despite a better-than-expected quarter and improved outlook. The chip-equipment supplier's second-quarter earnings rose 35% from last year to $412.8 million, or 26 cents a share, beating estimates by 3 cents. This quarter, it sees earnings of 28 cents or 29 cents a share; analysts expected 27 cents a share. Applied Materials dropped 92 cents, or 5.2%, to $16.93.

Compuware's

(CPWR)

fourth-quarter profit more than doubled, reaching $56.4 million, or 15 cents a share, 2 cents better than expected. Sales at the Detroit-based IT service provider fell slightly and missed estimates. The stock was off 4 cents to finish at $7.25.

Circuit City

(CC) - Get Report

said it expects breakeven results for the first quarter. The Thomson First Call currently stands at a penny a share for the quarter. Circuit City was higher by 52 cents, or 1.8%, to $29.45.

Investors will see more earnings reports late Wednesday, including results from

Salesforce.com

(CRM) - Get Report

and

Intuit

(INTU) - Get Report

.

On Thursday, Earnings reports are expected from

Dell

(DELL) - Get Report

,

Sears Holding

(SHLD)

and

Gap

(GPS) - Get Report

Away from earnings,

XM Satellite

(XMSR)

saw action Wednesday after the music industry filed a copyright lawsuit over a new device that lets radio listeners store songs. XM denied the claim and said it will vigorously defend itself. Shares lost $1.01, or 5.7%, to $16.62.

In analyst moves Wednesday, Piper Jaffray upgraded

Autodesk

(ADSK) - Get Report

to outperform, citing channel checks, while Bear Stearns lifted

Automatic Data

(ADP) - Get Report

, also to outperform.

Autodesk tacked on 7 cents, or 0.2%, to $38.26. Automatic Data gained 21 cents, or 0.5%, to $44.10.

Elsewhere, Citigroup initiated coverage of

McDonald's

(MCD) - Get Report

as a buy, assigning a $41 stock price target. The firm also began coverage of

Starbucks

(SBUX) - Get Report

as a hold with a stock price target of $40.

McDonald's fell 14 cents, or 0.4%, to $34.56, while Starbucks was off 65 cents, or 1.8%, to close at $36.41.

Selling spread to European markets, as London's FTSE 100 dropped 2.4% to 5704 while Germany's Xetra DAX fell by 2.5% to 5704. Elsewhere, Japan's Nikkei rose 0.9% overnight to 16,308, while Hong Kong's Hang Seng added 1.4% to 16,615.