NEW YORK - Wall Street retreated Wednesday but managed a late-day partial recovery as investors reacted uneasily to Federal Reserve Chairman Ben Bernanke's comments on the economy and news that two Bear Stearns Cos. hedge funds were essentially worthless.
Even without any bad news, a downturn in stocks was expected after the rally that began last week. On Tuesday, the Dow nudged past the 14,000 mark for the first time. With no major catalyst behind the advance, the record run has perhaps been puzzling to market watchers trying to determine if it has room to build or has run its course.
Investors sold off shares as Bernanke, speaking before the House Financial Services panel as part of the central bank's midyear forecast, said the economy should strengthen into 2008 and inflation risks remain the Fed's "predominant" concern. He also said the housing sector might get worse before it gets better - and remains a risk to consumer spending and overall economic growth.
Analysts said the Fed chief's testimony didn't contain anything new, but that it still had a cautious overtone. Bernanke's comments exacerbated investors' concern over news that the Bear Stearns funds were left essentially worthless by bad bets on subprime loans, and lackluster quarterly earnings reports.
"Bernanke didn't really say a whole lot of things that were new, but he added to a combination of seemingly negative events," said Todd Salamone, director of trading at Schaffer's Investment Research. "But, investors are already reeling from Bear Stearns' hedge funds sparking more subprime fears, and new worries about earnings."
Corporate earnings reports continued in earnest. JPMorgan Chase & Co. posted better-than-expected earnings, but the bank said it increased reserves set aside to cover mortgage losses. Also adding to investor concern, Intel Corp. reported lackluster profit margins for the second quarter, and Yahoo Inc. lowered its forecast.
The Dow fell 53.33, or 0.38 percent, to 13,918.22. The blue chip index was down by as much as 134 points during the session; a late-afternoon rebound wasn't unexpected given the market's recent volatility.
Broader indexes also fell. The Standard & Poor's 500 index fell 3.20, or 0.21 percent, to 1,546.17, while the Nasdaq composite index dropped 12.80, or 0.47 percent, to 2,699.49.
Bonds rose as fixed-income investors interpreted Bernanke's comments on housing as favorable; they're looking for interest rates to at least remain stable. The yield on the benchmark 10-year Treasury note fell to 5.03 percent from 5.07 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.
A barrel of light sweet crude rose $1.03 to $75.05 on the New York Mercantile Exchange. Oil rose after the U.S. Department of Energy said gasoline stockpiles unexpectedly fell, despite a bigger-than-expected rise in refinery operations.
The market had more bad news from the housing industry when builder Pulte Homes Inc. reported late Tuesday it expects to post a hefty loss from continuing operations for the second quarter, due to large charges and a worsening consumer environment. Shares of the company fell 62 cents, or 2.7 percent, to $22.09.
Bear Stearns late Tuesday said its hedge funds were squeezed by wrong-way bets on the direction of the mortgage market, which has been struggling with a spike in defaults among risky borrowers. Shares dropped 89 cents to $139.02.
JPMorgan Chase, the nation's third-largest bank, said Wednesday its earnings rose 20 percent in the second quarter amid benefits from a surge in investment banking fees. However, Chief Executive Jamie Dimon said the firm remains on guard for a possible fallout from the mortgage industry, and shares fell $1.34, or 2.7 percent, to $48.58.
Investors also sifted through the latest inflation reading. The Labor Department said its Consumer Price Index rose 0.2 percent in June following a big 0.7 percent jump in May. The reading was in line with market expectations and had little effect on index futures trading.
Core inflation, which excludes often volatile energy and food costs, also rose a moderate 0.2 percent last month.
The Commerce Department also said Wednesday home construction rose 2.3 percent in June following two consecutive months of declines. Wall Street had expected a more modest increase.
The tame readings on consumer prices could help ease some concerns about inflation, which remains among Wall Street's chief concerns. Investors are hoping rising prices won't prompt the Federal Reserve to put off an eventual interest rate reduction or even to raise rates. Even if the Fed doesn't act, higher costs could prompt some consumers to curtail their spending. Such a retrenchment could dent corporate profits.
"Everyone was looking for an uptick in the data, or some kind of information that would provide an optimistic forecast," said Doug Roberts, chief investment strategist for Channel Capital Research. "Although there was really very little new information coming from Bernanke, it was still like the third out in a triple play when you combine it with poor earnings reports and the credit report from Bear Stearns."
In other corporate news, Intel reported second-quarter profits that met Wall Street's expectations after the bell Tuesday but turned in weak profit margins because of lower chip prices. Shares fell $1.29, or 4.9 percent, to $25.04.
Yahoo reported a 2 percent decline in its second-quarter earnings and brought down its forecast for the year. Shares fell $1.47, or 5.3 percent, to $26.06.
Altria Group Inc., parent of the Philip Morris cigarette companies, saw its second-quarter profit fall 18.3 percent but reported higher earnings from continuing operations as well as increased revenue. The company, one of the 30 that comprise the Dow industrials, lowered its full-year earnings forecast. The stock declined $1.04 to $70.24.
United Technologies Corp., also a Dow component, fell $1.30 to $75.54 after it reported a 4 percent increase in its second-quarter earnings amid growth in the conglomerate's commercial aerospace and construction businesses.
Declining issues outpaced advancers by a 2 to 1 basis on the New York Stock Exchange, where consolidated volume came to 3.55 billion, compared to 2.98 billion on Tuesday.
The Russell 2000 index of smaller companies was fell 3.98, or 0.47 percent, to 845.91.
Overseas, Japan's Nikkei stock average closed down 1.11 percent. At the close, Britain's FTSE 100 fell 1.34 percent, Germany's DAX index fell 1.804 percent, and France's CAC-40 fell 1.69 percent.