Dow slips 20 points on interest fears

February 24, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks slumped yesterday, ending a one-day rally, as interest rates turned up and concern spread that rates will rise further.

Telephone, household product, electric utility, chemical and drug stocks were among the session's biggest decliners.

The market slid after Federal Reserve Board Governor Lawrence B. Lindsey said the Fed will raise rates again if either inflation or expectations of inflation pick up. On Tuesday, Fed Chairman Alan Greenspan told Congress short-term rates are more likely to rise than fall.

"The signal from the Fed is that short rates are going up and [30-year Treasury] bonds are going down in price," said Michael Metz, chief market strategist at Oppenheimer & Co.

As long-term interest rates move to 7 percent, "that's not a real negative for the economy, but it could cause a cessation of funds into mutual funds," prompting a 15 percent to 20 percent collapse in stocks, Mr. Metz said.

The Dow Jones industrial average fell 19.98 points, to 3,891.68, paced by United Technologies Corp., Goodyear Tire & Rubber Co. and Aluminum Co. of America, after falling as low as 3,882.96.

In the broader market, the Standard & Poor's 500 Index fell 0.77, to 470.69. The Nasdaq Combined Composite Index dropped 2.04, to 789.11, hurt by weak technology stocks such as Novell Inc., Oracle Systems Corp., Intel Corp. and Cisco Systems Inc.

More than five stocks declined for every four that rose on the New York Stock Exchange, where volume advanced to 309.9 million shares from 270.65 million Tuesday.

"Institutional money managers are very gun-shy right now," said Hugh Johnson, chief investment strategist at First Albany Corp. With the Fed having raised the federal funds rate to 3.25 percent from 3 percent Feb. 4, "one shoe has already dropped, and [investors] are waiting for the other to fall," he said.

The federal funds rate is what banks charge each other for overnight loans to meet reserve requirements.

Partly in reaction to questions about the direction of Fed policy, U.S. Treasury bond prices slumped and yields rose as the government auction of $17 billion worth of two-year notes was met with weak demand. Today, the government plans to sell $11 billion of five-year notes.

The yield on the benchmark 30-year Treasury bond rose to 6.64 percent, from 6.60 percent Tuesday and a morning low of 6.59 percent yesterday.

Investors were encouraged Tuesday by Mr. Greenspan's remarks that the Fed will try to keep the inflation rate below 3 percent. Yesterday's comments by the Federal Reserve's Mr. Lindsey, however, reinforced the view that "Greenspan wasn't lying when he said the Fed was going to tighten credit," said Anthony Dwyer, chief market strategist at Sherwood Securities.

Bond yields have risen more than one-third of a percentage point since the Fed raised short-term rates.

Apart from Sears, Roebuck and Co., retailers were among the best performing stocks today. Home Depot Inc., which reported a 16 percent increase in fourth-quarter earnings Tuesday, climbed $2.25 yesterday, to $42.375; Lowe's Cos. gained $1.125, to $62.375; and Wal-Mart added 75 cents, to $29.

The most active stocks in U.S. composite trading were British Petroleum PLC, Tele-Communications Inc., Wal-Mart Stores Inc., MCI Communications Corp. and Intel Corp.

Hershey Foods Corp. fell $1.75, to $51.75. The maker of chocolate candy was lowered to "hold" from "buy" by Janney Montgomery Scott.

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