Wall Street slips after Fed comments, but Cisco surges

By Leah Schnurr

NEW YORK (Reuters) - Stocks fell on Thursday, with the downturn accelerating late in the day after a Federal Reserve official said the central bank could begin easing up on its monetary stimulus this summer.

The three major U.S. stock indexes had earlier traded in a tight range, supported by a gain of more than 12 percent in Cisco Systems shares and as investors took in a batch of economic data that pointed to slower growth.

But the S&P 500 finished near its session low following the comments from John Williams, the president of the Federal Reserve Bank of San Francisco, who also said the Fed could end its bond purchases later this year, assuming the labor market continues to grow stronger.[ID:nN9E8KD02P] Williams is not a voter on the Fed's policy-setting panel this year.

"When a Fed governor is out there and mentions this possibility, it does spook the market a little because I don't think anybody quite knows how the stock market is going to react once (the stimulus) is taken away," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.

The Fed's purchases of $85 billion a month in bonds has been a significant driver of the rally in equities that has taken indexes to record highs and pushed the S&P 500 up nearly 16 percent this year.

Analysts also said the comments could have been viewed as a reason to take a pause after such a strong run-up in stocks.

"It turned a boring day into a bit of profit taking," Ghriskey said.

Other Fed officials on Thursday called for the central bank to stop buying mortgage-backed bonds, citing improvement in the housing market.

The Dow Jones industrial average <.dji> dropped 42.47 points, or 0.28 percent, to close at 15,233.22. The Standard & Poor's 500 Index <.spx> fell 8.31 points, or 0.50 percent, to end at 1,650.47. The Nasdaq Composite Index <.ixic> slipped 6.37 points, or 0.18 percent, to finish at 3,465.24.

Earlier, the Dow reached an all-time intraday high at 15,302.49.

The Nasdaq fared better than the other two major indexes as Cisco shot up 12.6 percent to $23.89 after the network equipment maker posted a higher-than-expected quarterly profit and said current-quarter revenue could increase.

Dell , in the midst of a takeover battle between activist investor Carl Icahn and its billionaire founder, reported a steep drop in quarterly profit after the closing bell as personal computer sales continued to shrink. The stock slipped 0.5 percent to $13.37 in after-hours trade. [ID:nL2N0DX272] During the regular session, Dell's stock dipped 0.2 percent to end at $13.43.

In other news after the close, J.C. Penney reported that operating margins plunged in the first quarter while total sales and same-store sales registered double-digit declines - in line with its warning last week. The stock vacillated between gains and losses, and was most recently down 1 percent at $18.60. [ID:nL2N0DX2AP] The company has gone back to basics with marketing and promotions aimed at winning back customers, who left in droves under the failed strategy of former Chief Executive Ron Johnson.

Early in the day, economic data set a lackluster tone in markets as data from the Philadelphia Federal Reserve showed factory activity in the mid-Atlantic region contracted, while the Commerce Department reported that U.S. housing starts plummeted 16.5 percent in April. New claims for jobless benefits unexpectedly jumped last week.

However, investors had speculated that soft underlying inflation also means the Fed has room to continue its economic stimulus.

Wal-Mart Stores Inc fell 1.7 percent to $78.50 and dragged on the Dow after the world's largest retailer posted a quarterly profit that missed expectations, with sales down 1.4 percent at U.S. stores open at least a year.

Tesla Motors Inc shares gained 8.7 percent to $92.25 after the electric carmaker said it aims to raise $830 million through a stock-and-debt offering that will be used to repay its U.S. Department of Energy loans with interest. The stock has surged more than 50 percent since the company reported earnings last week.

Volume was roughly 6.45 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the year-to-date average daily closing volume of about 6.34 billion.

Decliners outnumbered advancers on the NYSE by a ratio of 3 to 2, while on the Nasdaq, 14 stocks fell for nearly every 11 that rose.

(Editing by Jan Paschal)