S& P 500 Tumbles to a 7-Month Low As Once-Key Sectors Fall Out of Favor

A trader leans on a telephone post on the floor of the New York Stock Exchange, Friday, June 9, 2006. Stocks were narrowly mixed in aimless trading as Texas Instruments Inc.'s improved outlook and a broker's upgrade of Coca-Cola Co. helped Wall Street steady itself following this week's plunge. (AP Photo/Henny Ray Abrams) (Henny Ray Abrams - AP)

NEW YORK, June 12 -- U.S. stocks continued their five-week slide Monday as the Dow Jones industrial average lost about 100 points and the Standard & Poor's 500-stock index fell to its lowest point in seven months, erasing all its gains for 2006.

World stock indexes from Germany and Britain to Mexico and Egypt also did badly as investors concerned about a tightening world monetary supply continue to flee high-risk investments such as emerging markets and commodities.

The tremendous amount of money available to be invested "fueled the commodity boom, the housing bubble, and the small and microcap stocks," said Liz Ann Sonders, chief investment strategist for Charles Schwab & Co. "Now the tide is going out, and it's taking out the same boats that it brought in."

The Dow, which closed at 10,792.58, has fallen 7.3 percent since its recent peak on May 10. The S&P 500, which closed at 1236.40, down 15.90, has dropped below its December 2005 close and is down 6.5 percent since the May peak. The technology-heavy Nasdaq composite index, which fell 43.74 to close at 2091.32, is down nearly 10 percent since May.

Among the big losers since that peak: housing-related firms including KB Home, Home Depot Inc. and Pulte Homes Inc. and industrial companies such as Caterpillar Inc., Alcoa Inc. and 3M Co.

The speed of the decline has surprised analysts, many of whom still believe that the U.S. economy is in reasonable shape and will continue to grow, albeit at a slower pace.

Hedge funds and other institutional investors may be one reason for the slide, said Dreyfus Corp. chief economist Richard B. Hoey. Over the past decade, these lightly regulated investment pools have exploded in size from $500 million in assets under management in 2000 to more than $1.1 trillion today, and many of them use borrowed money to make short-term trades to try to capitalize on market momentum.

While small investors "tend to react slowly, hoping it will turn around, this leveraged institutional money, when [the market] stops going, they tend to get out fast," Hoey said.

Some market watchers also argue that some investors are worried that the central banks in general -- and the Federal Reserve in particular -- will overreact to the early signs of inflation that emerged last month and raise interest rates high enough to push the U.S. economy into recession.

U.S. investors are waiting for two key monthly economic reports that may give clearer signals about inflation: the producer price index, due to be released Tuesday, and consumer price index, which comes out Wednesday. Most economists expect the core CPI rate, minus energy and food, to be up two-tenths of a percent.

If it comes in lower "you're going to see a monster rally," predicted Alec Young, equity market strategist for Standard & Poor's. "With every [down] day like this the risk-reward ratio gets more and more favorable, especially for people who didn't have a lot of money in the market run-up of the last three years."

But Schwab's Sonders cautioned that the tighter money supply could continue to put a damper on stock prices. "I don't see a near-term buying opportunity," she said, adding that Schwab is encouraging its customers to keep more money than usual in cash.