Wall Street snaps rally amid Bernanke comments, hedge fund concerns

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.