Weak retail sales report halts stock market rally

NEW YORK — Wall Street shifted into reverse Tuesday after a surprisingly weak retail sales report punctured the market's optimism about the economy.

The poor sales data, combined with a sharp drop in wholesale prices, overshadowed better-than-expected earnings reports from Johnson & Johnson and Goldman Sachs, leading the Dow Jones industrial average down 137.63, or 1.7 percent, to 7,920.18, according to preliminary calculations.

Broader measures also lost ground after three days of gains. The Standard & Poor's 500 index fell 17.22, or 2 percent, to 841.51, and the Nasdaq composite index fell 27.59, or 1.7 percent, to 1,625.72.

Financial stocks were especially weak after Goldman said it would raise $5 billion to repay government bailout money. Investors speculated that other major banks might follow suit, which would put pressure on their stocks. Citigroup Inc. and JPMorgan Chase & Co. are also due to report results this week.

Tuesday's selling was orderly and extended a give-and-take pattern the market has followed since halting a steep slide over the first two months of the year. Stocks have risen from 12-year lows since then on hopes that banks are getting through the worst of their problems and the economy might be bottoming out, though both the Dow and S&P 500 are still below where they started the year.

The unexpected 1.1 slump in retail sales in March reported Tuesday undermined the market's brightening outlook for the economy. The drop was far worse than the increase of 0.3 percent that analysts polled by Thomson Reuters had been expecting and marked the biggest fall in three months. Investors watch retail sales trends closely as a barometer of consumer spending, which makes up two-thirds of U.S. economic activity.

"The choppy data that we're seeing, whether it's economic or earnings, reminds us that we're still not out of the woods," said Sean Simko, head of fixed income management at SEI Investments in Philadelphia. "The market always has a tendency to go too far too fast."

Investors took little comfort from speeches by President Barack Obama and Federal Reserve Chairman Ben Bernanke that there have been hopeful signs about the economy and that a sustained recovery won't arrive quickly.

A separate report on wholesale prices released Tuesday gave another poor reading on the economy.