Stocks retreat on tepid economic data

NEW YORK – Wall Street retreated Monday on more signs of economic weakness and executive shake-ups at two major banks – reminders of the ongoing fallout from the credit crisis. The Dow Jones industrial average fell more than 130 points.

Two key economic reports indicated that the economy is still struggling. The Institute for Supply Management’s manufacturing index for May showed its fourth straight monthly decline, while the Commerce Department said construction spending dipped in April for the sixth time in seven months because of a drop in home building.

S&P’s review of the financial sector suggested there could be more write-downs coming, though likely not as large as in recent quarters, and “further sharp deterioration” in mortgage loan portfolios and residential construction.”

Brian Gendreau, investment strategist for ING Investment Management, said the markets have been “hypersensitive about anything to do with credit” in recent months, and the combination of the S&P cuts, the bank news and comments in an overseas speech by U.S. Treasury Secretary Henry Paulson weighed on the market.

“Basically, he suggested that there were further problems to come in the banking and financial sector,” Gendreau said. “That’s just toxic for stocks.”

The retreat follows a pattern in the past month where investors, looking to ignite a rally, quickly back-pedal with any hint of bad economic or corporate news. One such spoiler has been the record pace of oil prices, which has not given investors much respite. After slipping last week, light, sweet crude for July delivery rose 41 cents to settle at $127.76 a barrel on the New York Mercantile Exchange.

The Dow Jones industrial average fell 134.50, or 1.06 percent, to 12,503.82, after gaining last week on better-than-expected economic data and a pullback in oil prices. The blue chip index had shed more than 200 points during the session.

Broader stock indicators also dropped Monday. The S&P 500 index fell 14.71, or 1.05 percent, to 1,385.67. The Nasdaq composite index fell 31.13, or 1.23 percent, to 2,491.53.

Overseas, Japan’s Nikkei stock average closed up 0.71 percent. Britain’s FTSE 100 fell 0.76 percent, Germany’s DAX index fell 1.24 percent, and France’s CAC-40 fell 1.58 percent.