A

sharper-than-expected spike in the

Consumer Price Index brought the stock market to its knees today. Investors cowered before the twin phantasms of inflation and recession, leaving the

Nasdaq Composite Index at its worst level in nearly two years.

The stocks hitting new lows today made a veritable Who's Who of technology, dropping the Comp 49.4 to 2268.9, its lowest close since March 3, 1999. But the weakness that's persisted through the last few weeks is no longer confined to tech, as financial stocks, retailers and cyclical stocks were also hammered, helping to trample the

Dow Jones Industrial Average, which ended at its low, down 204 to 10,526.6. The

S&P 500 ended off 23.67 to 1255.27. Decliners more than doubled advancers on both the NYSE and the Nasdaq.

"This is a reaction to the inflation numbers we saw, and it's also the fact that this second-half belief in a bull market recovery is in question," said Barry Hyman, chief investment strategist at

Weatherly Securities

.

Blame It on the Stones

Analysts were happy to blame this morning's CPI report. This key indicator of wholesale inflation showed a 0.6% increase in January, double the expected 0.3% rise, owing to increases in energy, medical and tobacco prices. On a year-over-year basis, growth in the core rate, which excludes food and energy prices, was unchanged from last month's 2.6%.

But in noting significant price increases in various economic sectors, the report muddles the market's expectations for an economic rebound. Until now, the main positive the market was hanging its hat on was notion of further action from the

Federal Reserve

, which has been easing interest rates aggressively in hopes of heading off a recession. If inflation becomes a worry (and economists sounded more concerned today), that's going to make life harder for the Fed, which will be contending with higher prices as well as slowing growth -- two problems that call for vastly different monetary remedies.

Returning to the stock market, the prospect of a slowdown combined with rising prices means even more falling profits. Nor are many companies likely to be eager to pass on those price increases, as falling consumer confidence and insecurity about the job market are likely to further depress consumer demand.

Nowhere were these expectations of a quick rebound more evident than in technology. The market rallied significantly in January in anticipation of this, figuring that for about six months, tech spending would recede before rebounding sharply late in the year. But today's data and last week's earnings warnings, from

Nortel

(NT)

,

Hewlett-Packard

(HWP)

and

Dell

(DELL) - Get Report

, are putting a wrench in that theory.

Strike One

"It's causing people to believe the valley might be broader than they might have thought before," said Joe Keating, chief investment officer at

Kent Funds

in Grand Rapids, Mich. "Therefore, when

people discount the upturn in earnings, maybe it's not six months away, maybe it's 12 months away. It's resulted in somewhat of a buyers strike."

A buyers' strike all over the place. Among the technology stocks hitting new lows today were storage leader

EMC

(EMC)

, down 13%; Unix server maker

Sun Microsystems

(SUNW) - Get Report

, off 11%;

Nokia

(NOK) - Get Report

, down 4.9%; and optical fiber company

Corning

(GLW) - Get Report

, which actually rose a whopping 0.8% after hitting a 52-week low intraday.

Chip stocks aside, the major technology indices were slaughtered. The

American Stock Exchange Networking Index

fell 2.7%, the

Philadelphia Stock Exchange Computer Box Maker Index

3% and the

Nasdaq Telecommunications Index

3.5%.

"Do you feel a sudden urgency to run out and buy stuff?" asked Doug Myers, vice president of equity trading at

IJL Wachovia

in Atlanta. "Outside of a few semiconductor stocks, everyone else is taking it on the chin."

Among the sectors particularly hurt today were financial stocks and retailers. Financial stocks are particularly sensitive to interest rates, expectations of Federal Reserve policy, and the general direction of the economy. With many believing the economy is in no-growth mode, the financial stocks are down, based on the theory that loan activity will dry up, trading volume will decline and credit quality will deteriorate.

The

Amex Broker/Dealer Index

dipped 2.8%, while the

Philadelphia Stock Exchange/KBW Bank Index

lost 3.2%. Continued fears of weaker retail trading caused

Charles Schwab

(SCH)

to fall to another 52-week low, losing 2.8% to $21.23.

Retail stocks, which have had their spurts upward this year, tanked today, again, because people expect demand will remain lousy. The

S&P Retail Index

lost 5.3%, led by

Home Depot

(HD) - Get Report

, off 7%.

The recent slide has the Dow back to its mid-January levels. That is likely to increase the clamor among investors for the Fed to cut the fed funds rate once again, before its upcoming March 20 meeting.

The market's ups and downs have become a clash between expectations for a Fed-led recovery and the belief that profits will plunge further before recovering. The latter belief gained traction throughout the day.

And analysts don't see much in the way of a catalyst to lift the market. The most uplifting thought expressed was that of Hyman, who figures that a bottom might be formed if that ever-elusive "capitulation" is reached in the bellwether tech stocks like EMC,

Cisco

(CSCO) - Get Report

, down 3.6%, and

Intel

(INTC) - Get Report

, off 2.2%.

Market Internals

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Most Active Stocks

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Sector Watch

What was working today? Semiconductors and defense. That's defensive stocks and defense stocks. The semiconductor equipment stocks have managed to hold it together in recent days, mostly because they've been putrid for the better part of five months. So the

Philadelphia Stock Exchange Semiconductor Index

gained 0.2%, with

Applied Materials

(AMAT) - Get Report

rising 1.5%.

Tobacco giant

Philip Morris

(MO) - Get Report

hit another new high, rising 0.3% to $48.06, and helping the

S&P Tobacco Index

to a 0.5% gain. Among other defensive areas, the

Amex Pharmaceutical Index

rose 1.4%.

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Bonds/Economy

Treasuries were lower today as the market adjusts to the CPI released this morning.

The benchmark 10-year

Treasury note lately was down 9/32 to 98 28/32, raising its yield to 5.145%.

In economic news, the

Consumer Price Index

(

definition |

chart |

source

)rose 0.6% for the month, up from 0.2% growth in December and 0.3 points more than economists polled by

Reuters

had anticipated. It is the biggest jump since last March, when prices also rose 0.6%, marking the biggest increase since October 1990. Fears of inflation may be tempered a little because a 17.4% increase in the price of natural gas drove the increase. Still, the core CPI, which excludes food and energy prices, also rose more than expected, jumping 0.3%; a 0.2% increase had been forecast.

In other news, both imports and exports fell during December, by 0.7% and 0.8%, respectively, narrowing the trade deficit. The trade deficit, which fell to $33 billion, has now shrunk for the third consecutive month, from $33.1 billion in November. Economists had expected $32.18 billion. For the year, the deficit hit a record $369.7 billion.

Real earnings

(

definition |

chart |

source

), which measure weekly wages after they have been adjusted for inflation, were unchanged for January after having declined by 0.3% in the previous month. The 12-month average is down by 0.5% after falling by 0.3% in December.

The

BTM-UBSW Weekly Chain Store Sales Index

(

definition |

chart ) rose by 0.9% for the week ended Feb. 17, moving along at a healthy clip after registering 0.8% growth in the previous week. The yearly moving average also rose to 4.1% from 3.4%.

The

Redbook Retail Average

(

definition |

chart ) for February is 2.4% ahead of the number recorded during this month last year. It is 0.5% below January's and 0.4% behind the targeted decline.

The overall message of sales activity is positive, with most retailers having beaten sales objectives. While some of the sales were of winter clearance items, Valentine's Day-related merchandise lured the majority of shoppers.

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International

Turkish overnight interest rates soared to 6,100% as the central bank bolstered the lira in a bid to maintain control over inflation, while concerns about the stability of the government intensified. The currency and debt crisis in Turkey was enough to prompt rumors of an emergency meeting by the Federal Reserve, but since the Fed held its regular weekly meeting yesterday, those were believed to be bogus.

Overnight rates, which were about 40% last week, skyrocketed after the central bank restricted the supply of the local currency to force banks to sell dollars for the liras they need to meet daily commitments. Analysts believe that such a defense of the currency could result in the collapse of some commercial banks in Turkey and spark a contagion reminiscent of the Russian debt crisis of 1998.

Meanwhile, in Europe, technology concerns went continental today. At the end of European trading today, those tech woes were apparent. London's

FTSE

ended off 7.7 to 5972.4 as an upswing in drug makers was humbled by another day of losses for telecommunications stocks.

Vodafone

(VOD) - Get Report

stumbled to near two-year-lows. Germany's

Xetra Dax

slid 103.58 to 6348, due to sharp losses in

Deutsche Telekom

(DT) - Get Report

while Paris'

CAC

dropped 74.4 to 5474.4.

And please, just don't look directly at the land of the rising sun. You'll burn your eyes.

Japan's

Nikkei

has performed so poorly in the last few months that it makes the Comp look like Harvey Keitel in a Scorsese film. Today, reeling in the wake of yesterday's 4% fall in the Comp, the Nikkei dropped 148.28, or 1.1%, to 13,100.08, touching a 28-month closing low, turning the clock all the way back to Oct. 15, 1998. Fear and loathing reigned supreme as spooked investors stayed away from high technology because of profit warnings the fear of getting burned again.

Meanwhile, across the sea, the Hong Kong

Hang Seng

fell 175.85, or 1.1%, to 15,351.51. That's a five-week low for the index, which was still up on the year despite recent selloffs. Telecommunications stocks were the biggest losers, led by

China Mobile

.

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