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As inflation worries mount, stocks suffer more losses

A rise in labor costs fans investors' concerns that the Fed could increase interest rates.

NEW YORK - Stocks slid for a second straight session Wednesday after an increase in labor costs stirred concerns about inflation and interest rates, and as the yield on the benchmark 10-year Treasury flirted with 5 percent. The Dow Jones industrials fell 129 points, adding up to a drop of more than 200 points in the past two sessions.

Data showing unit labor costs rose a higher-than-expected 1.8 percent, raising concerns of inflationary pressures, heightening investor concerns that the inflation-wary Federal Reserve might lean toward raising rather than lowering rates later this year.

"In the last week or two, the expectation that the Fed was going to lower interest rates in the next six months has been put to the side, so the bond market has reacted," said George Shipp, chief investment officer at investment adviser Scott & Stringfellow, referring to a recent rise in bond yields as investors saw a reduction in interest rates as less likely. Yields move higher as bond prices fall.

He said investors shouldn't read too much into the pullback in stocks.

"The market has come a long way. We're down for a couple days, but we've been up for 11 out of the last 12 months. Right now, you'd have to call it normal profit taking."

The Dow fell 129.79, or 0.95 percent, to 13, 465.67. Broader stock indicators also fell. The Standard & Poor's 500 index fell 13.57, or 0.89 percent, to 1, 517.38, and the Nasdaq composite index fell 24.05, or 0.92 percent, to 2, 587.18.

The decline Wednesday came a day after the three major indexes slumped after remarks from Fed Chairman Ben Bernanke and service sector data hinted that the economy is on the rebound, lowering the chance of an interest rate cut. But despite the fresh concerns about inflation, the economic picture doesn't appear to have changed substantively from last week when the S&P 500 broke a 7-year-old closing record and the Dow continued to hit fresh highs.

"I think the underlying fundamentals that have gotten us to this point - global growth, excellent corporate profitability, obviously a lot of merger activity - haven't changed," Shipp said.

Douglas Pyle, a managing director at U.S. Trust Co., contends that after the run-up in stocks in recent months a pullback was overdue.

"You have all this stuff that really I think is just noise. We've had such a move that's been uncorrected that it's probably long overdue that something like this happens. It's normal, and I think it's healthy. I think the longer-term picture for equities in the U.S. is quite positive."

[Last modified June 6, 2007, 23:06:26]