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Bumpy Day for Wall Street, Your Street : Dow Drops 140, Yields Rise as Investors Fear Another Fed Rate Hike

March 28, 1997|THOMAS S. MULLIGAN | TIMES STAFF WRITER

NEW YORK — Wall Street staggered Thursday as strong economic news raised fears that the Federal Reserve Board will hike interest rates again soon, prompting predictions that the stock market will be stagnant--or worse--for months.

The Dow Jones industrial average plummeted as much as 216 points before rising late in the day to close at 6,740.59, down 140.11 points, or 2%.

In the bond market, the yield on the 30-year Treasury bond--a benchmark for long-term interest rates, including mortgage rates--rocketed to a six-month high of 7.08% from 6.98% on Wednesday, after the government reported a stunning surge in home sales in February.

The jump in bond yields triggered a broad pullback in the stock market, worsening a decline that has been ongoing for many stocks in recent weeks.

Indeed, the Dow's steep slide was its second major loss in three weeks: The index tumbled 160.48 points, or 2.3%, on March 13. The Dow now has shed 344 points, or 4.9%, since reaching an all-time high of 7,085.16 on March 11.

On the New York Stock Exchange, falling stocks outnumbered winners by more than 3 to 1, although trading volume was only moderate ahead of the holiday weekend. Markets will be closed today in observance of Good Friday.

"I think we've already seen the [stock market] high for the year," said Michael Metz, chief investment strategist for Oppenheimer & Co. in New York. "It's great to be on the sidelines with cash right now."

Analysts disagree on the market's longer-term outlook, but there is a growing consensus that stock prices have risen as far as they're going to go for at least the next few months.

Technology stocks were struggling even before the blue-chip Dow began to decline, and smaller-company stocks in general have been weak this year.

Bearish analysts have argued that the record high prices many stocks reached earlier in the year weren't justified by companies' underlying earnings.

Meanwhile, Fed Chairman Alan Greenspan has helped set an increasingly negative tone for the market since December, repeatedly questioning whether stock prices might be inflated by an "irrational exuberance" on the part of investors.

Greenspan had also warned in unusually direct language in recent weeks that the central bank was poised to raise short-term interest rates to try to slow the economy's apparently brisk pace and keep inflationary pressures subdued.

The Fed took that step on Tuesday, raising its benchmark interest rate by a quarter-point--the first credit-tightening move since 1995.

With Thursday's housing-sales report, many economists believe the Fed will have little choice but to raise rates further by June.

And historically, higher rates have been the stock market's worst enemy, analysts note. That is why some experts think the stage is set for a pullback at least as sharp as the one last summer, which lopped 7.5% off the Dow between May 22 and July 23.

Rising bond yields may entice investors out of stocks, experts said. And the flow of money into stock mutual funds has eased lately, reducing the fuel needed for a further run-up.

But some analysts say that first-quarter corporate earnings reports, which will begin to be released in about two weeks, could be surprisingly strong because of the healthy economy.

Peter Canelo, chief investment strategist for Dean Witter Reynolds and currently one of Wall Street's more bullish observers, believes earnings will buttress the market, keeping share prices from falling much further.

Canelo sees stocks trading in a range that will keep the Dow between 6,650 and 7,100 in the next few months.

On the other side is Salomon Bros. equity strategist David Shulman, who believes the market will retreat at least to where it started the year--about 6,450 on the Dow and 740 in the Standard & Poor's 500-stock index. That implies a further drop of more than 4% in both indices.

As for earnings, Shulman said that Nike posted terrific earnings last week on stronger-than-expected global shoe sales. But its stock has plunged nearly 6% since the earnings announcement.

Among Thursday's highlights:

* Every major market index sank with the Dow. The S&P 500 dropped 16.62 points, or 2.1%, to 773.88. The Nasdaq composite index of mostly smaller stocks fell 19.57 points, or 1.5%, to 1,249.51.

* Financial stocks led the market lower, pressured by rising interest rates. BankAmerica sank 3 1/4 to 106, Chase Manhattan tumbled 3 1/2 to 96 3/8, Wells Fargo lost 9 1/8 to 292 and Merrill Lynch fell 2 1/4 to 87 1/2.

* Among the blue chips to fall sharply: AlliedSignal lost 2 7/8 to 72 5/8, Boeing fell 3 1/2 to 101 3/4, IBM dropped 3 1/4 to 137 and Johnson & Johnson was off 2 at 55 1/8.

In currency trading, falling stocks and bonds hurt the dollar, which closed in New York at 123.48 Japanese yen, down from 124.12 on Wednesday, and 1.674 German marks, down from 1.690.

Market Roundup, D6

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