Blue chip stocks eased for a second session on Thursday, but overall the market held up remarkably well even as bond yields rose again.
The Dow Jones industrials fell 32.56 points to 7,258.13, and most broader indexes closed lower as well. However, winners edged losers on the New York Stock Exchange and on Nasdaq.
What's more, the Russell 2,000 index of small stocks hit a record high, rising 1.40 points to 371.46, finally topping its previous record of 370.65 set on Jan. 22. (Investor Spotlight, D7.)
The bond market did its best to undercut stocks, as the yield on the bellwether 30-year Treasury bond topped 7% in afternoon trading, before ending at 6.99%, up from 6.95% on Wednesday.
That left the yield at its highest level since April 28.
Shorter-term yields also rose, as more traders took the view that the Federal Reserve Board--which opted on Tuesday to leave interest rates unchanged--still is likely to tighten credit further to slow the economy.
"It's a question of when, not whether" the Fed boosts rates to curb the economy and quell inflation, argued Jay Mueller, who oversees $3 billion of bonds at Strong Capital in Milwaukee. "Everything we see says the economy is still in good shape."
So far, the stock market is taking bonds' nervousness in stride. Analysts say the fresh strength in smaller stocks, which had been hit harder than blue chips in the March and early-April market decline, shows that equity investors continue to bargain-hunt.
The Russell 2,000 index, even at a record on Thursday, is up just 2.4% this year; the Dow, in contrast, is up 12.6%.
"It's a rotation of the marketplace, and it's going to go on for a while," said F. Van Kasper, head of San Francisco-based investment firm Van Kasper & Co. "Investors are driven to smaller stocks by slower earnings growth in the bigger companies and, I think, a reduction in the capital gains tax."
Other analysts, however, warn that if long-term bond yields top 7% again, the stock market may quickly turn south.
Among Thursday's highlights:
* Many industrial stocks whose fortunes depend on a healthy economy closed higher, including paper firm Bowater, up 2 7/8 to 49 5/8; Goodyear Tire, up 7/8 to 56 3/4; USX-U.S. Steel, up 3/4 to 31 5/8; and Furon, up 5/8 to 24 1/8.
* On the downside, utility stocks suffered as bond yields rose. The Dow utility index drooped 0.83 point to 219.38. It has fallen about 4% since early May.
* AT&T gained 7/8 to 35 3/8 after the firm's chairman, at Wednesday's annual meeting, said the company is working hard to turn around its slumping stock.
* Two initial stock offerings enjoyed success. Hartford Life surged 3 7/8 to 32 1/8 on its first day of trading, and Summit Holding Southeast jumped 3 1/8 to 14 1/8.