Dow drops 120 points

US stocks tumbled after Wal-Mart said higher petrol prices has limited customer spending.

The news sent many US retail stocks lower, while government data showing a larger-than-expected jump in inflation also dampened investor enthusiasm.

Wall Street is facing increasing evidence that high energy prices, spurred by record crude oil futures, are nipping consumer spending.

Wal-Mart stock drooped after the company blamed lower quarterly revenues on higher petrol prices. Shares of other retailers, including Target, Home Depot and Limited Brands dropped as well.

“We are starting to see the bite from some of the risks that have been lurking in the background, like oil,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers. “I think it’s going to continue to be tougher for this market to do anything positive.”

Investors also worried over the latest reading of the Labour Department’s Consumer Price Index, which rose 0.5% in July – the biggest increase in three months and larger than the 0.4% hike economists had expected. With food and energy prices removed, “core” CPI rose 0.1%.

The Dow Jones industrial average fell 120.93, or 1.14%, to 10,513.45.

Broader stock indicators also lost ground. The Standard & Poor’s 500 index fell 14.53, or 1.18%, to 1,219.34, and the Nasdaq composite index fell 29.98, or 1.38%, to 2,137.06.

Bonds rose sharply as stocks moved lower, with the yield on the 10-year Treasury note falling to 4.21% from 4.28% late on Monday. The dollar was up against the euro and gold prices fell.

Crude oil futures traded in a narrow range but remained in the mid-US$60 range – high enough to keep petrol and heating oil prices near record levels. A barrel of light crude was quoted at US$66.08 (€53.46), down 19 cents on the New York Mercantile Exchange.

In one of the few bright spots of the session, investors welcomed the Commerce Department’s report on home construction. For July, the number of housing projects started fell slightly to an annualised 2.042m units, but housing permits issued reached a 21-year high. Yet the retail sector sputtered.

Investors focused on Wal-Mart and its warnings of future troubles. While the Dow component’s earnings beat Wall Street’s profit forecasts by 2 cents per share, the company’s profit gain was its smallest in four years and its revenues missed estimates.

The company warned that its third-quarter earnings would be lower than expected, again blaming high gas prices for eating into shopper’s spending. Wal-Mart fell 1.53 to 47.57.

Fellow Dow industrial Home Depot fell 94 cents to 40.67 despite reporting a 14% jump in quarterly profits that beat Wall Street’s expectations by 3 cents per share on strong revenues.

The company, apparently avoiding the energy pinch felt by Wal-Mart and other retailers, also increased its profit forecasts for the rest of the year.

Teen retailer Abercrombie & Fitch closed regular trading down 2.32 to 61.23. Its earnings, released after the close of regular trading, missed analysts’ estimates and the stock dropped 4.48 to 56.75 in extended trading.

Ed Peters, chief investment officer at PanAgora Asset Management, called the news from retailers “potentially troublesome”. Other retail and consumer stocks dropped, including Target, which fell 1.44 to 55.71, Limited, which fell 84 cents to 23.35 and Starbucks, which fell 1.15 to 51.09.

Computer maker Gateway, which reported after the close of regular trading on Monday, posted a quarterly profit for the first time in three years, but cut its profit and sales forecasts for the rest of the year. That led analysts at Bear Stearns to cut their rating on the company to ”underperform” from “peer perform”. Gateway tumbled fell 78 cents, or 20%, to 3.11.

Delta Air Lines rose 19 cents to 1.58 after it sold its Atlantic Southeast Airlines unit to SkyWest in an effort to stave off bankruptcy. SkyWest climbed 2.97 to 25.01.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to 1.38bn shares, down from 1.18bn Monday.

The Russell 2000 index of smaller companies fell 11.03, or 1.66%, to 654.61.