By Ellie Ismailidou and Victor Reklaitis, MarketWatch

S&P, Dow join Nasdaq in negative territory for the year

U.S. stocks sold off sharply Thursday on mounting fears that the Federal Reserve's next interest-rate hike could come as early as June.

A flurry of mixed economic data failed to calm investors' fears that the U.S. central bank would keep rates lower for longer amid hawkish comments by Fed policy makers Thursday morning.

Wall Street shrugged off strong earnings reports from Wal-Mart and Cisco--which initially helped offset declines in the Dow.

And a drop in oil prices (http://www.marketwatch.com/story/oil-prices-drop-on-dollar-strength-rising-inventories-2016-05-19), which declined due to a stronger dollar and an unexpected increase in U.S. crude inventories, pulled down the shares of energy and industrial companies, eroding appetite for risky assets, like stocks.

The S&P 500 fell 21 points, or 1%, to 2,026, led by sharp losses in telecom stocks, down 1.7%. The industrial sector was the second-worst performer, down 1.4%. Utilities and consumer-staples stocks were the only sectors in positive territory, both up roughly 2%. The S&P was down 0.8% for the year.

The Dow industrials fell 186 points, or 1.1%, to 17,340 led by sharp losses in Goldman Sachs Group Inc.(GS) and Boeing Co.(BA), both down 2.7%. The Dow was down 5.3% for the year on Thursday.

   Meanwhile, the Nasdaq Composite   fell 52 points, or 1.1%, to 4,688. 

Thursday's moves came after minutes from the Fed's latest meeting (http://www.marketwatch.com/story/most-on-fed-ready-to-hike-rates-in-june-if-economic-data-strong-minutes-show-2016-05-18) suggested the Fed is seriously considering raising interest rates at its coming meeting in June, provided the U.S. economy continues to strengthen.

Market strategists said the idea that rates could rise sooner than they expected has made investors uncomfortable, causing them to dump stocks.

"It's a knee-jerk reaction," said Kent Engelke, chief economic strategist at Capitol Securities Management. The market is still "hijacked" by central bank action, Engelke said, and "any remote hints of monetary policy change makes stocks trade off."

Mounting rate-hike fears were also behind the sharp losses for telecom stocks, said Michael Arone, chief investment strategist at State Street Global Advisors.

Stocks that are typically viewed as income substitutes or bond proxies become expensive when the Fed is about to raise interest rates and typically sell off, Arone said.

Still, many analysts were questioning the central bank's hawkish posture, given doubts about the U.S. economy's strength. Adding to those doubts, ratings agency Moody's on Thursday cut its 2016 forecast for U.S (http://www.marketwatch.com/story/moodys-downgrades-2016-growth-forecast-to-2-from-23-2016-05-19). economic growth to 2%, down from 2.3%.

"For investors, it is confirmation that the ratings agency does not have as much confidence in the U.S. economy as perhaps the Fed members had envisaged," said Naeem Aslam, ThinkForex's chief market analyst, in a note.

A flurry of mixed data on Thursday didn't offer investors more clarity about the health of the economy.

The number of Americans who applied for unemployment benefits (http://www.marketwatch.com/story/jobless-claims-sink-16000-to-278000-2016-05-19) in mid-May fell by 16,000 to 278,000--with most of the drop concentrated in New York--in a reassuring sign the labor market is still fairly healthy. And a basket of leading economic indicators (http://www.wsj.com/articles/conference-boards-leading-economic-index-jumped-in-april-1463668092) advanced at a quicker clip in April, suggesting U.S. growth will pick up after a slow start to the year.

But the Philadelphia Fed's barometer of regional manufacturing activity (http://www.marketwatch.com/story/philly-fed-index-dips-to-negative-18-in-may-2016-05-19) dropped further into negative territory this month, far below analysts' expectations, on a decline in new orders.

"We now have two manufacturing [indexes] for May back below zero. A few days ago we saw the New York index fall into negative territory," said Peter Boockvar, chief market analyst at The Lindsey Group, in emailed comments.

Boockvar questioned whether the stagnation in manufacturing would warrant the Fed's intention to normalize rates. But others were more optimistic.

"Collectively, this data reflects the mixed nature of the economy and suggests that overall growth is going to rebound following a slow start to the year," said Thomas Simons, senior money market economist at Jefferies, in emailed comments.

More Fed talk: Different Fed officials offered further hawkish commentary on Thursday, which rattled the market.

Richmond Fed President Jeffrey Lacker defended the Fed's hawkish stance in an interview with Bloomberg on Thursday, saying that the case is pretty strong for a June hike (http://www.marketwatch.com/story/richmond-feds-lacker-says-brexit-shouldnt-cause-delay-in-raising-interest-rates-2016-05-19). Lacker, who is a nonvoting member of the Federal Open Market Committee, argued that markets took the wrong signal from the Fed's decision to stand pat on interest rates in March and April.

Fed Vice Chairman Stanley Fischer said Thursday that the U.S. needs faster potential growth (http://www.marketwatch.com/story/feds-fischer-says-us-needs-faster-potential-growth-2016-05-19-91032131)but he didn't discuss the short-term outlook for monetary policy or the economy.

And New York Fed President William Dudley said an interest-rate increase in June or July is possible if fresh data confirm his optimistic forecast of economic growth.

Individual movers: Shares in Wal-Mart Stores Inc.(WMT) rose 9% after the giant retailer's quarterly earnings beat forecasts (http://www.marketwatch.com/story/wal-mart-shares-jump-after-earnings-beat-estimates-upbeat-outlook-2016-05-19). Wal-Mart's rise put its stock on track to log its best one-day gain in more than seven years.

Cisco Systems Inc. was on track for its largest daily gain in three months, rising 4%, following its upbeat results late Wednesday (http://www.marketwatch.com/story/cisco-gains-as-results-forecast-beat-expectations-2016-05-18).

Agricultural giant Monsanto Co.(MON) jumped 5.2% as chemicals company Bayer AG(BAYN.XE) confirmed it had approached Monsanto about a takeover (http://www.marketwatch.com/story/bayer-makes-takeover-approach-to-monsanto-2016-05-19).

Advance Auto Parts Inc.(AAP) trimmed sharp premarket losses to traded down 1% after the seller of car parts posted quarterly results that missed expectations and said its chief financial officer will depart (http://www.marketwatch.com/story/advance-auto-parts-shares-plunge-after-results-miss-expectations-cfo-resigns-2016-05-19).

Retailer Dick's Sporting Goods Inc.(DKS) gained 8.2% despite offering downbeat guidance (http://www.marketwatch.com/story/dicks-sporting-goods-shares-drop-after-downbeat-guidance-2016-05-19).

Read more:Traditional retailers stumble in competing with Amazon (http://www.marketwatch.com/story/traditional-retailers-stumble-in-their-efforts-to-compete-with-amazon-2016-05-12)

And see:Target is the latest retailer to feel the "Amazon effect" (http://www.marketwatch.com/story/target-is-the-latest-retailer-to-feel-the-amazon-effect-2016-05-18)

Shares in Google parent Alphabet Inc.(GOOGL) (GOOGL) were down roughly 1% following news late Wednesday about new efforts in cloud computing (http://www.marketwatch.com/story/diane-greene-google-very-serious-with-enterprise-cloud-ambitions-2016-05-18) and artificial intelligence (http://www.marketwatch.com/story/google-rolls-out-new-products-relying-on-artificial-intelligence-2016-05-18).

Other markets: European stocks traded lower, with travel-related names falling (http://www.marketwatch.com/story/travel-operators-airlines-slump-after-egyptair-plane-vanishes-2016-05-19) after an EgyptAir plane vanished from radar (http://www.marketwatch.com/story/egyptair-flight-ms804-vanishes-from-radar-en-route-to-cairo-2016-05-19). Asian markets mostly closed in the red (http://www.marketwatch.com/story/asian-stocks-choppy-as-fed-news-turns-investors-wary-2016-05-18). The ICE U.S. Dollar Index rose, helped by a rate hike looking more likely. That weighed on dollar-denominated commodities such as gold (http://www.marketwatch.com/story/gold-prices-drop-as-interest-rate-rise-looks-more-likely-2016-05-19) and crude oil which were both lower early Thursday.

 

(END) Dow Jones Newswires

May 19, 2016 11:28 ET (15:28 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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