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Stocks tumble as Dow falls nearly 200 points

Adam Shell and Kim Hjelmgaard
USA TODAY
Traders work on the floor at the start of the trading day at the New York Stock Exchange.

The Dow tumbled sharply Tuesday and posted its worst day in May as a stronger U.S. dollar and mixed economic data rattled investors.

After returning from a three-day holiday weekend, investors sent the Dow Jones industrial average down for a second straight day. After losing more than 200 points earlier in the session, the blue chips finished down 190 points, or 1%, to 18,041.54.

The Standard & Poor's 500 index dropped 1% to 2104 and the Nasdaq composite index skidded 1.1% to 5033.

The downturn was broad-based as all 10 of the S&P 500 sectors were lower and all 30 Dow stocks dropped.

STOCKS:Live markets blog

The dollar rose sharply against the Japanese currency, increasing to 123.21 yen from 121.55 yen. Oil prices took a hit as U.S. benchmark crude dropped 2.8% to $58.05 a barrel.

The Dow's big drop was due in large part to renewed fears that interest rate hikes from the Federal Reserve might come sooner than expected this fall.

While the Federal Reserve last week in the minutes of its April meeting said a June rate hike is "unlikely," a speech Friday by Fed chair Janet Yellen suggested that a rate hike is still on the table for later this year if the economy continues to strengthen and inflation continues to tick higher and closer to the Fed's 2% mandate.

A solid April durable goods orders report released earlier today gave credence to the idea that the Fed may move earlier and more aggressively than Wall Street currently expects. Most Wall Street pros see the first rate hike coming no earlier than September and many expect just one rate hike in 2015. Dollar strength is again hurting investor investment, as well.

"In my view it is the strength of the durable goods report that built on last week's core CPI reading (which showed inflation at the consumer level rising more than expected); the combination has pushed the dollar higher, and pulls forward expectations for the anticipated Fed rate hike," says Mark Luschini, chief investment strategist at Janney Montgomery Scott.

"The stronger dollar works to crimp multinational profits, which represent over 40% of S&P 500 cumulative profits," he adds, "and the (tick higher in consumer inflation) worries investors that "hike soon but go slow" may become "hike sooner and go faster."

Despite all the nervousness around the negative impact of rising rates on stock prices, a rise in rates is not necessarily a major negative for stocks, and should be viewed as a return to normalcy, counters Brian Belski, chief investment strategist at BMO Capital Markets.

"Fears surrounding higher interest rates … are bunk," Belski told USA TODAY. "Higher rates are a function of an improving economy. As such, the 'fundamental' investing formula has re-connected. Stocks go up. Economy goes up. Interest rates go up. The U.S. dollar goes up. This is the way it 'should' work."

In economic news:

• A manufacturing report provided mixed data as orders for durable goods orders dropped 0.5% in April but orders in the key business investment category gained 1%.

• The housing market continued to show signs of improvement as home prices rose faster than expected in March and new home sales in April rose 6.8%.

• Consumers were feeling slightly better in May as the confidence rose slightly in May as the Conference Board's consumer confidence index rose to 95.4 in May from 94.3 in April.

Asian markets were higher as Hong Kong's Hang Seng gained 0.9% and Japan's Nikkei 225 rose 0.1%.

The Shanghai Composite rose 2% as China's economic planning agency announced Monday that it wanted to attract private investment to more than 1,000 local public-private projects for ports and other transport facilities, the environment and public services.

"Of course we can see the Chinese government is doing many things to stimulate real demand," Linus Yip, a strategist at First Shanghai Securities in Hong Kong, told the Associated Press. "Some macroeconomic indicators are not doing so well right now, so the market is trading on expectations."

In Europe, worries persisted that Greece might miss looming IMF repayments if it fails to receive bailout payments from creditors demanding it outline reforms and promise to meet cost-cutting targets.

The major benchmarks in Europe traded with losses. Germany's DAX index fell 1.6% and Britain's FTSE 100 dropped 1.2%.

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