June 5 (Bloomberg) -- U.S. stocks had their biggest loss since January after Federal Reserve Chairman Ben S. Bernanke was interpreted to suggest interest rates may keep climbing as the economy slows. Shares of companies whose earnings are most sensitive to a weakening economy, including Alcoa Inc. and Caterpillar Inc., led the retreat. The Dow Jones Industrial Average dropped to a three-month low after Bernanke, in a speech to the American Bankers Association, said the Fed ``will be vigilant'' to ensure a pickup in inflation isn't sustained.
The Fed chairman's remarks accelerated a decline that started as oil rose to a three-week high and a report showed slower expansion in U.S. service industries, causing concern that consumer spending will taper off.
``We've got the ingredients for a classic growth slowdown,'' said Jack Ablin, who helps manage $48 billion as chief investment officer at Harris Private Bank in Chicago. ``The market is finally starting to believe it.''
The Standard & Poor's 500 Index slid 22.93, or 1.8 percent, to 1265.29, the worst performance since Jan. 20. The Nasdaq Composite Index lost 49.79, or 2.2 percent, to 2169.62, erasing its 2006 gain.
The Dow average retreated 199.15, or 1.8 percent, to 11,048.72, with all except one of its 30 members falling. It is at a level not seen since March 9.
The Russell 2000 Index, a benchmark for companies with a median market value of $635 million, slumped 3.2 percent, its worst performance since October 2002. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, retreated 1.9 percent, the biggest loss since May 2003. The drop erased about $307 billion in market value.
Broadest 2006 Decline
The market had its broadest decline of the year, with more than eight stocks falling for every one that advanced on the New York Stock Exchange. Some 1.62 billion shares changed hands on the Big Board, 2.5 percent less than the three-month daily average.
Today's losses mirror those on May 30, when the market retreated on a drop in consumer confidence and higher oil prices. The S&P 500 had its worst monthly performance since July 2004 in May.
``Investors are focusing on interest rates, inflation and possible slowing earnings and a slowing economy,'' said David Darst, who manages about $700 billion as chief investment strategist at Morgan Stanley's individual investor group in New York. Stocks are probably only halfway done with falling from recent highs, he added. The S&P 500 has dropped 4.6 percent since reaching a five-year high on May 5.
Bernanke
Bernanke said the annual inflation rates for the Fed's preferred price benchmark, the personal consumption expenditures price index minus food and energy, rose 3 percent and 2.3 percent for the past three-month and six-month periods.
The central bank will be ``vigilant'' to ensure this pattern is not sustained, he said.
``You've got the worst of all possible worlds,'' said Philip Dow, director of equity strategy at RBC Dain Rauscher Corp. in Minneapolis. There's ``a slowing economy, and just to ensure that it slows down, you're going to have rates hiked.''
Yields
Bernanke's comments sent the benchmark 10-year Treasury note's yield, which moves inversely to price, up about 3 basis points to 5.02 percent, according to bond broker Cantor Fitzgerald LP. Rising bond yields have made that asset more attractive versus stocks.
The central bank has increased interest rates 16 straight times, to 5 percent. Traders are pricing in a 74 percent chance that they will raise again to 5.25 percent at the end of this month, up from 48 percent from before Bernanke's comments.
The Institute for Supply Management's index of non- manufacturing businesses, including banks, builders, real-estate agents and retailers fell to 60.1 last month from 63 in April. Economists expected 60 in a Bloomberg News survey. Readings above 50 indicate growth. The services industries are the largest part of the U.S. economy.
The U.S. economy ``is entering a period of transition,'' Bernanke said. ``The anticipated moderation of economic growth seems now to be under way.''
Raw-Material Stocks
A gauge of raw-materials shares lost 2.9 percent for the second-worst performance among 10 industry groups in the S&P 500. Alcoa, the world's largest aluminum maker, lost $1.19 to $31.38.
U.S. Steel Corp., the top U.S. steelmaker, fell $4.49 to $65.02. Allegheny Technologies Inc., a stainless steel producer, slid $4.82, or 7.2 percent, to $62.20 for the second-steepest decline in the S&P 500.
Freeport-McMoRan Copper & Gold Inc. lost $4.83, or 8.5 percent, to $51.91 for the worst performance in the S&P 500. The owner of the world's largest gold mine and second-biggest for copper cut its forecast of second-quarter copper output in Indonesia by 16 percent.
Industrial shares fell 2 percent. Caterpillar, the world's largest maker of earth-moving equipment, dropped $3.48, or 4.8 percent, to $69.33 for the biggest decline in the Dow average.
Crude oil for July delivery rose 0.4 percent to $72.60 a barrel in New York, the highest close since May 11. Iran said any action by the U.S. against its nuclear facilities may disrupt shipments from the Persian Gulf, which supplies 20 percent of the world's oil.
Homebuilders
An S&P index of homebuilding stocks declined 4.6 percent, the most this year, amid concern that the Fed's series of rate increases may continue.
D.R. Horton Inc., the largest U.S. homebuilder, fell $1.35 to $24.81. Pulte Homes Inc., the second-biggest, fell $1.58 to $29.75. On June 2, the company reduced its 2006 earnings forecast, citing a 29 percent drop in orders for April and May due to higher mortgage rates.
Trizec Properties Inc. was among the stocks that gained, jumping $4.08 to $28.68. The manager of office properties agreed to be bought by Brookfield Properties Corp. and buyout firm Blackstone Group for $8.9 billion including debt, or $29.01 a share.
A gauge of real estate companies was the only group among 24 in the S&P 500 to advance, adding 0.4 percent. Equity Office Properties Trust gained $1.41, or 4 percent, to $36.41 for the top gain in the S&P 500.
