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Dow Sheds 1.8% After Fed Cuts Outlook

Stocks plunged Wednesday after the Federal Reserve cut its 2008 outlook and oil finished above $133 a barrel.

The Dow Jones Industrial Average shed more than 227 points, or 1.8 percent, bringing its two-day point decline to about 450.

The Nasdaq also fell 1.8 percent, while the S&P 500 index lost 1.6 percent.

The central bank lowered its forecast to growth of 0.3 to 1.2 percent for 2008, from the prior range of 1.3 percent to 2 percent, saying it expects inflation to remain "elevated" and for unemployment to increase "significantly."

Still, policy makers aren't inclined to lower interest rates any further, as evident in minutes from the last Fed meeting, released at the same time.

Stocks had already been wallowing as crude oil popped above $132 a barrel after a report showed crude stocks shrunk by 5.4 million barrelslast week. The Fed news just sent the market spiraling even lower and then, as if stocks and oil were in a race for disaster, oil surged another dollar, ultimately settling at $133.17.

Crude's relentless ascent -- often by $1 to $2 a barrel per day, or in today's case, $4 -- is threatening to eclipse the tax-rebate stimulus, notes Tony Crescenzi, chief bond-market strategist at Miller Tabak. When Bush signed the stimulus act into law back in February, oil was at $93 a barrel -- a $40 increase. According to Crescenzi, if this keeps up, it would translate to a $300-billion increase in consumer energy costs for the year, far outpacing the $130 billion being distributed through the stimulus plan.

Airlines again took a beating, hitting fresh lows, due to soaring oil. Shares of American parent AMR skidded 24 percent after the carrier announced plans to cut domestic capacity 11 to 12 percent. It also took an unprecedented move in the industry, saying it would now charge $15 for the first checked bag.

United parent UAL plummeted 30 percent, while Northwest lost 18 percent and Delta fell 17 percent.

Boeing skidded 4.6 percent, making it the second-biggest drag on the Dow, after the company said oil prices are crimping growth.

Citigroup and American Express were the top three decliners on the Dow.

Hewlett-Packard came in a close fourth. The computer and software maker beat earnings expectations, as strength overseas offset weakness in the U.S. The report, which came out after the bell Tuesday, held little new from HP's preannouncement last week: HP earned 87 cents a share, as expected, and kept its guidance at 82 or 83 cents a share in its fiscal third quarter.

Also in the tech sector, Microsoft CEO Steve Ballmer said the software company is "not bidding to buy Yahoo," but is trying to have discussions about deals with the Web portal. Microsoft is reportedly interested in buying Yahoo's search business and taking a minority stake in the rest of the company. Shares of Microsoft and Yahoo slipped 0.2 percent in Germany.

Financials and materials were the biggest decliners among 10 key S&P sector indexes, falling 2.6 percent and 3 percent, respectively.

There was some concern about fallout from a computer glitch at Moody's that may have resulted in some debt securities incorrectly being assigned triple-A ratings.

Most financial stocks were at their lowest levels in a month, with Lehman Brothers falling 5 percent and Morgan Stanley off 4 percent.

Homebuilders fell to their lowest levels since March. Ryland skidded 9 percent, while Centex and Lennar lost 7 percent.

Mortgage applications felllast week to the lowest level of the year, reversing a trend in which applications had risen in recent weeks. The association's adjusted index of mortgage application activity fell 7.8 percent to 621.6 in the week ended May 16, a drop likely triggered by a rise in interest rates.

Investors cheered Time Warner's decision to splinter off Time Warner Cableas a separate company, bidding up the stocks 0.6 percent and 3.5 percent, respectively. Time Warner Cable shareholders will get a $10.9 billion dividend in the deal.

As conditions get tougher for brick-and-mortar shops, Barnes & Noble is said to be considering a bid for rival booksellerBorders , the Wall Street Journal reported. Barnes & Noble shares finished flat, while Borders jumped 8.8 percent.

A trio of retailers offered a bright spot with decent earnings reports.

BJ's Wholesale Club reported its earnings jumped 25 percent to $17.2 million, or 29 cents a share. The company also raised its full-year forecast to $2.04 to $2.14 a share from its prior range of $1.98 to $2.08 a share.

Off-price retailer Ross Stores reported its profit increased amid strong sales of dresses and shoes and better inventory and expense management.

Women's clothing retailer Talbots also reaped the benefit of better back-office management; the company posted an increase in earnings and backed its full-year forecast.

This Week:

THURSDAY: Jobless claims; Fed's Kroszner speaks; Earnings from Gap; Libertarians choose presidential candidate
FRIDAY: Existing-home sales; Bond market closes early for Memorial Day holiday

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