Investors spooked by hostilities in Iraq and a steep rise in oil prices sent stocks lower Thursday in light, post-Christmas trading.
Retailers were pressured after Wal-Mart Stores lowered its December sales expectations, while the dollar fell against the euro and gold prices added to their recent gains.
An afternoon sell-off on Wall Street ended a rally sparked by a government report indicating that new claims for unemployment benefits were dropping. The Dow Jones industrial average climbed more than 116 points before reversing direction. By session's end, the Dow was down 15.50 points, or 0.2%, at 8,432.61. Declines in Amazon.com and Microsoft helped pull the Nasdaq composite index down 4.58 points, or 0.3%, to 1,367.89. The Standard & Poor's 500 index was off 2.81 points, or 0.3%, at 889.66.
The Russell 2000 index, which tracks the shares of smaller companies, eked out a small gain, rising 1.28 points, or 0.3%, to 389.40. Small-company stocks often outperform stocks of larger companies during the last days of the year.
With many trading floors sparsely staffed around Wednesday's Christmas Day holiday and European markets closed for the day, volume was the lowest for a full trading day since Aug. 25, 2000, according to Bloomberg News. Decliners led advancers by 9 to 7 on the New York Stock Exchange.
Investors turned bearish after the U.S. military said warplanes from the U.S.-British coalition bombed Iraqi military command and communication targets in southern Iraq. The attack was in retaliation for the downing of an unmanned American surveillance drone on Monday, the military said.
The official Iraqi News Agency, quoting a military spokesman, countered that a mosque had been hit.
The rising tension with Iraq, a major Middle Eastern oil producer, along with the continued strike in Venezuela sent oil prices higher. Oil prices for February delivery climbed 52 cents to $32.49, and some analysts predict the price could hit $35 soon.
Oil prices have climbed more than $12, or 60%, this year -- and more than $5 just in December, strengthening fears that higher energy costs could stunt fragile economic growth.
Wal-Mart said it was cutting its December same-store sales forecast and now expects sales to rise 2% to 3%, below its earlier forecasts. Investors apparently anticipated the reduced sales figures and sent Wal-Mart shares up 6 cents to $49.76. But Federated Department Stores fell 24 cents to $27.66, and Amazon.com dropped $1.58 to $20.30, even though the S&P index of retail stocks managed a slim 0.5% gain.
The decline for Amazon.com came despite the online retailer's announcement that it finished its "busiest holiday season ever." Analysts speculated that investors had been rattled by Wal-Mart's report and so didn't respond positively to Amazon's news.
A Labor Department report showed that new claims for jobless benefits fell by a seasonally adjusted 60,000 to 378,000 for the workweek ending Dec. 21. The drop -- the largest decline since Oct. 6, 2001 -- left claims at their lowest level since Nov. 30.
In other highlights:
* Drug makers Pfizer and Pharmacia fell sharply after an article in the New England Journal of Medicine reported that the widely used arthritis drug Celebrex, made by Pharmacia, doesn't protect the stomach from dangerous bleeding ulcers as much as thought. Pfizer and Pharmacia co-promote the drug. Pfizer dropped $1.36 to $30.02, while Pharmacia was down $2.02 to $40.98.
* Microsoft fell 43 cents to $53.39 despite reporting that shoppers spent a record $10.7 billion in the fourth quarter at its MSN network of Internet services.
* Amgen dropped 77 cents to $50.68. A federal judge dismissed the Thousand Oaks-based company's lawsuit against the U.S. government that sought to stop Medicare from lowering reimbursement for its Aranesp anemia treatment when used in clinics and doctors' offices.
* Gold closed higher on war fears, but it failed to push through $350 an ounce. Near-term gold futures rose $1.90 to $348.70 in New York trading.
* The dollar slipped to a new three-year low against the euro in trading thinned by closed European markets.