Stocks fall after Fed raises rates

April 19, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks plummeted yesterday after the Federal Reserve raised interest rates for the third time this year, --ing hopes that first-quarter earnings would push stock prices higher.

The Fed raised the perceived target for the Fed funds rate, the rate banks charge each other for overnight loans. Economists said the target probably was increased to 3.75 percent.

The Fed boosted the funds rate to 3.25 percent from 3 percent on Feb. 4 and to 3.5 percent on March 22.

"Fear has replaced greed," said John W. Church Jr., chief investment officer of Glenmede Trust Co. Rising rates have prompted investors to become overly pessimistic about the market's prospects, he said.

The Dow Jones industrial average plunged 41.05, to 3,620.42. The decline was led by shares of General Electric Co., which fell after its Kidder, Peabody & Co. brokerage unit said it would take a first-quarter charge.

Broader market indexes also fell, with Standard & Poor's 500 index falling 3.72, to 442.46. The Nasdaq combined composite index skidded 7.52, to 720.45.

Thirteen stocks fell for every five that rose on the New York Stock Exchange. Trading was light, with 271 million shares changing hands on the Big Board.

"I think that just like the first Fed tightening was well publicized, this one too has been well-publicized and well forecast," said Gail Dudack, chief technical analyst at S.G. Warburg & Co. "We expect stocks will follow bonds" over the next few days, she said.

The yield on the benchmark 30-year Treasury rose to 7.42 percent after the Fed said it was reining in rates. The yield was 7.29 percent at Friday's close.

The rate increase vanquished optimism that first-quarter profits would boost stock prices, analysts and money managers said.

"The market has still got interest rates locked into its sights, and there is no way that is going to change for a while," said Thom Brown, managing director at Rutherford, Brown & Catherwood in Philadelphia.

Mr. Brown said that he expects first-quarter earnings to be strong, but that many companies' stock prices already reflect earnings optimism. "Some of them will be pretty good, but a lot of that has already been discounted," he said.

Companies expected to release earnings this week include General Dynamics Corp, Kellogg Co., Sears Roebuck & Co., Westinghouse Electric Corp., Bristol-Myers Squibb Co., Blockbuster Entertainment Corp., Dean Witter Discover and International Game Technology.

Higher interest rates are likely to push economic growth below an annual rate of 3 percent this summer, from 7 percent late last year, and reduce growth in corporate profits to about 15 percent from a previously anticipated "low 20s," said James Weiss, a portfolio manager at IDS Equity Advisors in Minneapolis, which manages assets of $18 billion.

Shares of GE fell $1.875, to $94.875, after its Kidder Peabody unit said it will take a $350 million pretax charge against first-quarter earnings because the head of government bond trading at the subsidiary made "phantom trades" that inflated profits.

United Technologies Corp. fell $1.375, to $64.50, after the defensecompany reported earnings of 71 cents a share in the first quarter, up from 42 cents a year earlier. The consensus earnings estimate of 12 analysts was 72 cents a share, according to Institutional Brokers Estimate System.

Platinum Software shares fell $6.4375, to $3.5625. The company said it expects to post a "substantial" loss in the fiscal third quarter and that it will restate earnings for the five previous quarters.

The Irvine, Calif.-based software maker also said its four top executives, including its CEO, resigned. The restatement is expected to result in a cumulative loss and a decrease in shareholders' equity of $13 million to $20 million, the company said.

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