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Economy's fading momentum drives money out of stocks, into bonds

May 17, 2011 | 11:27 am

Wall Street is worried that the "soft patch" is getting a lot softer.

New reports on Tuesday signaled more weakness in the U.S. economy, fueling another sell-off in stocks and driving some investors into the relative safety of bonds.

The Dow Jones industrial average was down 108 points, or 0.9%, to 12,440 at about 11:20 a.m. PDT, the fourth decline in five sessions. [Updated at 1:15 p.m.: The Dow closed down 68.79 points, or 0.6%, to 12,479.58.]

The broader market was holding up better than the 30-stock Dow, which was suffering from a 7% plunge in shares of Hewlett-Packard after the tech giant warned of lower-than-expected sales and earnings.

The average New York Stock Exchange stock was off just fractionally, as gains in lower-risk shares such as utilities offset losses in issues more sensitive to economic swings.

The Treasury bond market benefited from investors’ jitters: The yield on the 10-year T-note fell to 3.11%, its lowest level since early December and down from 3.15% on Monday.

Engineplant Stocks have been losing ground since May began amid more data pointing to a loss of momentum in the economic recovery. Market bulls have maintained that the economy has hit a soft patch but isn’t facing a serious downturn.

“Data suggests that the global economy has slowed recently, but we believe that it is still in the midst of transitioning from recovery to self-sustaining expansion,” Bob Doll, chief equity strategist at money management titan BlackRock Inc., wrote in his latest weekly outlook letter.

But two reports on Tuesday raised fresh concerns about the U.S. economy’s health. Housing starts plunged 10.6% in April from March, another sign of the real estate market’s morbid state. And industrial production was flat in April, hurt in part by a drop in auto output because of parts shortages stemming from Japan’s devastating earthquake.

Even excluding autos, however, output of manufactured products rose a scant 0.2% last month, economists at Goldman Sachs said in a note. “Together with downward revisions to previous months, these figures imply that the annualized three-month growth rate of manufacturing output excluding vehicles slowed from 8.4% in January to just 1.8% in April,” Goldman said.

With the housing data and the production figures, “The string of bad news gets a little longer and a little worse,” said Robert Brusca, head of FAO Economics.

Industrial stocks, which had been one of the sectors leading this year’s market surge through April, led the market lower on Tuesday. Caterpillar was down $3.69, or 3.5%, to $102.40; 3M was off $1.84, or 1.9%, to $93.62.

Still, the overall market hasn't declined much from its recent highs. The Standard & Poor’s 500 index is down 2.5% from its multiyear high reached on April 29.

-- Tom Petruno

Photo: Engine production at a Nissan plant in Iwaki, Japan, which just resumed production Tuesday after shutting down after the country's March earthquake. Credit: Toshifumi Kitamura / AFP/Getty Images