Stocks take a dive on renewed inflation fears

September 10, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks tumbled yesterday as a larger-than-expected jump in August's producer prices signaled inflation might be building, raising concern the Federal Reserve would lift interest rates again this year.

The wholesale-price report hurt stocks partly because higher rates would slow the economy and corporate-profit growth. Stocks sensitive to rising rates, such as electric utility, telephone, bank and auto companies, suffered the largest losses.

The Dow Jones industrial average plunged 33.65, to 3874.81, the biggest loss since June 30. At one stage, it fell 50.13, to 3858.33, triggering the New York Stock Exchange's limit on computerized trading for the first time since June 24. The Dow industrials closed down 10.77 points during the holiday-shortened week.

In the broader market, the Standard & Poor's 500 index dropped 4.96 to 468.18 and the Nasdaq composite index shed 5.57, to 763.73. The Wilshire 5000 Index slumped 39.57 to 4648.91 and the Russell 2000 Index of small stocks fell 1.39 to 256.76.

Almost 18 stocks fell for every five that rose on the New York Stock Exchange, where volume dipped to 294.3 million shares from 296.1 million.

"We got a bad [inflation] number, and we may have another one coming," when the consumer price index is released Tuesday, ** said Edward Laux, head trader at Kidder, Peabody & Co. "If there are stronger hints of inflation being around, it's probably not going to bode well for stocks."

The Labor Department said higher gasoline and food costs helped drive up producer prices 0.6 percent in August, the largest gain since October 1990. Excluding food and energy, core prices rose 0.4 percent. Both readings surpassed economists' expectations.

"It's a very negative number for the bond market," said Thomas Gallagher, head trader at Oppenheimer & Co. "The scenario is the Fed will be back" later this year to raise rates and cool the economy.

The Fed has already raised interest rates five times this year in an effort to tame inflation.

Yesterday, Hanson PLC, Microsoft Corp., MCI Communications Corp., RJR Nabisco Holdings Corp. and American Barrick Resource Corp. were the most actively traded stocks.

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