Stocks fall as retail sales data disappoint

Wall Street shifted into reverse Tuesday after a surprisingly weak retail sales report deflated somewhat 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 Group, leading the Dow Jones industrial average down 137.63 points, or 1.7% to 7,920.18.

Broader measures also lost ground after three days of gains. The Standard & Poor’s 500 index slumped 17.23 points, or 2%, to 841.50, and the Nasdaq composite index fell 27.59, or 1.7%, to 1,625.72.

The Russell 2,000 index of smaller companies sank 3.2%.

Two stocks declined for every one that rose on the New York Stock Exchange.

Stocks of retailers fell after the report on their sales. Macy’s fell 7.3%, while Best Buy fell 7%.

Financial stocks were especially weak after Goldman Sachs said it was selling $5 billion in a stock offering so it could repay government bailout money. Investors speculated that other major banks might follow suit, putting pressure on their balance sheets and stock prices. Citigroup and JPMorgan Chase are due to report results this week.

The unexpected 1.1% slump in retail sales in March, the steepest fall in three months, undermined the market’s brightening outlook for the economy. Analysts had expected an increase of 0.3%. 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.

Speeches by President Obama and Federal Reserve Chairman Ben S. Bernanke did little for the market. Both warned that a sustained economic recovery wouldn’t arrive quickly despite some hopeful signs.

In a report Tuesday that fed fears of deflation, the Labor Department said wholesale prices tumbled 1.2% in March as the cost of gasoline, other energy products and food fell sharply. The concern is that falling prices can generate a spiraling effect in which consumers and businesses defer spending to wait for lower prices.

Tuesday’s drop in stocks came despite more signs that companies reporting earnings for the January-March quarter might be able to top Wall Street’s modest expectations.

Shares of Johnson & Johnson rose 22 cents to $51.37 after the maker of healthcare products said its first-quarter profit fell, but not as much as expected.

Goldman Sachs reported late Monday that it earned $1.66 billion in the quarter, well above what analysts were expecting. The company said it would raise $5 billion from investors in hopes of repaying the $10-billion investment it received from the government last year.

But Goldman shares fell $15.04, or 12%, to $115.11 after its stock offering was priced at $123 a share, a discount of 5.5% to Monday’s closing price.

Among other financial stocks, JPMorgan declined 8.9% and Morgan Stanley dropped 12%.