Stock and bond prices tumbled Tuesday after new economic data revived the market's inflation fears.
The Dow Jones industrial average staggered lower, ending below 8,000 points for the first time in three weeks on new evidence that economic growth is accelerating from its tame pace of the second quarter. Broader market indexes also ended lower.
The Dow slumped 101.27 points to 7,960.84. In the broader market, declining issues beat advances 4 to 3 in moderate trading on the New York Stock Exchange.
The Standard & Poor's 500 fell 10.47 points to 926.53, and the NYSE composite fell 4.45 points to 480.76. The Nasdaq composite fell 10.50 points to 1,576.24.
The change in fortunes has come as the yield on the 30-year Treasury bonds has climbed from a 17-month low of 6.30% on July 31.
On Tuesday, long-term yields rose to 6.67% from 6.63% on Monday. Bonds investors were reacting to a midafternoon private report that said national retail sales rose 0.9% in the first week of August compared with July. The data, from LJR Redbook Research, raised worries that important government reports on inflation at the wholesale and consumer levels, due to be released today, would show that prices are on the rebound.
Traders are worried that if the economy is too strong, the Federal Reserve Board will try to cool it off by raising interest rates. Fed policymakers will meet Tuesday.
Traders said inflation fears weren't helped by a report released Tuesday by the Labor Department that said the nation's productivity, or output per hour worked, grew at a seasonally adjusted annual rate of just 0.6% in the second quarter. That was a slower gain than in the first three months of the year.
"People are aware of the potency of [today's] retail sales number," said Larry Wachtel, an analyst at Prudential Securities. "If there's any sign the consumer is really starting to spend, that will push the whole inflation issue right back to the forefront."
With stocks still richly valued and investors back on their heels, analysts predicted more volatility for the near term.
"We're in a nervous environment, and volatility is a fact of life here," said James Crawford, senior vice president at Trevor Stewart Burton & Jacobsen Inc.
Among Tuesday's highlights:
* Computer-related stocks turned mixed late in the session after attempting to rally for a second day out of last week's slump. On the Big Board, IBM rose 38 cents to $103.38 and Digital Equipment gained $1 to $45.81. But Compaq fell $1.31 to $57.63 and Hewlett-Packard dropped 50 cents to $68.25.
* Drug stocks fell for the second day after Morgan Stanley recommended lightening up on the group, saying it is not likely to outperform the market in coming quarters. Merck fell $1.63 to $93.63, Pfizer fell $1.69 to $53.19, American Home Products lost $1.81 to $76.06 and Eli Lilly declined $1.88 to $106.81.
* Banking stocks were firm for most of the session but gave ground in the final hour as interest rates moved higher. Citicorp fell $1.94 to $134.31, Bankers Trust dropped $1.31 to $98.56 and Fleet Financial fell 88 cents to $65.25.
In overseas trading, the Nikkei index in Tokyo gained 1.46%, the FTSE-100 index in London rose 0.87% and the DAX index in Frankfurt added 0.69%.
Elsewhere, corn prices soared after the U.S. Department of Agriculture cut nearly half a billion bushels off its estimate of this year's crop.
At the Chicago Board of Trade, corn futures for delivery in December closed 12 cents higher, their maximum daily increase, at $2.65 1/4.