The Federal Reserve’s move to cut the primary interest rate on Tuesday by a quarter percent to 4.25 sent stocks plummeting in afternoon trading.

This story first appeared in the December 12, 2007 issue of WWD. Subscribe Today.

Retail shares were particularly hard hit as Wall Street was hoping for a deeper reduction in interest rates to spur the economy as it slogs through the subprime mortgage collapse.

The Dow Jones Industrial Average dropped 2.1 percent to close at 13,432.60, while the broader S&P 500 Index fell 2.5 percent to 1,477.59. The S&P Retail Index shed 4.2 percent to 425.63.

The rate cut was the third since September, and Fed officials said there could be additional cuts in the near future if the mortgage and housing crisis escalates.

Stocks were mixed for most of the day, but plunged following the rate cut. In the retail sector during the afternoon session, stocks were down between 2 and 5 percent. Trading volume was heavy.

At the bell, Wal-Mart Stores closed down 0.75 percent to $49.06, while rival discounter Target dropped 4.5 percent to $53.12.

Shares of department stores were also hit hard. Macy’s slumped with a 4.2 percent decline to $29.13. Kohl’s fell 5.9 percent to $49.46, while J.C. Penney saw shares decrease 4.5 percent to $45.73.

Teen apparel retailers Aéropostale, Abercrombie & Fitch and American Eagle Outfitters were down 6.3, 4.6 and 3.7 percent, respectively, to $24.72, $80.72 and $22.07, while Gap Inc.’s shares declined 5.1 percent to $20.43.

Separately, Mark Montagna, retail analyst at C.L. King & Assoc., maintained his “strong buy” rating on Dress Barn after David Jaffe, chief executive officer, offered bullish comments on key business segments in a report published in WWD.

Based on Jaffe’s comments, Montagna believes the Maurices division remains strong, while Dress Barn continues to stumble. Shares of Dress Barn ended the day down 2.6 percent to $13.31.

In a separate report, Kimberly Greenberger, specialty retail analyst at Citigroup, highlighted Abercrombie & Fitch, The Children’s Place and TJX Cos. as her three favorite stocks for the end-of-the-year period and for the beginning of next year.

Greenberger cited Aber­crombie’s accelerating international growth, strong direct sales, prudent inventory management and share repositioning to drive earnings-per-share growth as key factors to its continued success.

Off-price retailer TJX Cos. is in an ideal inventory position and should perform well in an environment where the consumer is looking to save, the analyst said.

“In our holiday outlook note, we conveyed our bullish view of the softline sector stocks, calling for a rally in our coverage universe over the next six to eight weeks,” she said in the note. “However, given the rally across our coverage universe, we are more selectively putting money to work in the sector.”