NEW YORK — Stock trading was a bumpy ride last week after investors fled the market on fears of the impact of higher interest rates on corporate profits.

Stocks tried to rally later in the week as investors found it hard to resist the bargain prices of stocks left in the wake of a three-day sell-off, which ripped more than 300 points off of the Dow Jones Industrial Average.

As a result, the WWD Comp­osite Stock Index shed 1.9 percent on Friday to 1,089.15 from 1,110.20 in the prior week, while the S&P 500 lost 2.8 percent to 1,252.30 from 1,288.22.

The pullback hit all the major indices, and began last Monday when Federal Reserve chairmen Ben Bernanke indicated that interest rates could rise as a way to tame inflation. But investors quickly surmised that higher interest rates would cut sharply into corporate profits. That’s when the market tumbled.

“It is reasonably clear that the U.S. economy is entering a period of transition,” Bernanke said at the International Monetary Conference held in Washington, D.C., on June 5. The last three years have seen “above-trend growth,” he said, but that will slow down and stabilizing inflation will be a priority for the Federal Reserve moving forward.

Dana Telsey, analyst and founder of the Telsey Group, said during the sell-off that retail stocks have been pressured by a “seasonal, second-quarter depression.” But she said the sector also is feeling pressure from consumer fears of inflation, rising interest rates and higher energy prices. “The macro factors this year are taking more of a toll than usual,” she said.

Telsey said the macroeconomic factors will continue to influence stock performance, but retail sales trends also will be important.

Walter Loeb, consultant and founder of Loeb Associates, expects consumer spending to soften. “The consumer is cutting back and reexamining how to make ends meet,” Loeb said.

Robin Lewis, of the retail consultancy of the same name and publisher of the “Robin Reports,” is more bullish on the future of consumer spending.

“The American consumer is an anomaly,” Lewis said. “Like heroin addiction, we are a compulsively, obsessively consumptive culture. To stop the consumer from spending takes an enormous increase on the pricing side of things.”

This story first appeared in the June 12, 2006 issue of WWD. Subscribe Today.

Loeb said interest rates “themselves have no impact. The fact is that the mortgage payments may be going up and variable mortgages may have an impact.”

A potential rise in interest rates, coupled with already high energy costs and weakening consumer confidence, could create some challenges in the second half of the year, said Michael Stanley, executive vice president of Rosenthal & Rosenthal. Despite expectations to the contrary, the economy “still chugs along,” he said.

However, so far, interest rates have stayed comparatively low. If the Federal Reserve raises rates, the economic pressures facing shoppers could prove to be too much.

“The potential of all those factors coming together and starting to hold back the economy in the second half exists,” he said. “I’m still guarded about the second half.”

This week, Wall Street will be looking closely at corporate earnings and economic reports to gauge the health of business. Due out are initial jobless claims, the Producer Price Index, retail sales and the Consumer Price Index. The Fed’s Biege Book is also expected to be released.

Weekly % Changes
(Ending June 9)
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