Fallout from rate rise topples stocks

November 18, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks declined yesterday amid concern that rising interest rates will crimp consumer spending, hurt banks' profits and siphon money into other investments.

"We're seeing more fallout from Tuesday's rate rise" by the Federal Reserve, said Todd Clark, senior director in equity trading at Mabon Securities Corp. "Banks are taking it on the chin, and the retailers are getting hit."

Losses in automakers and other credit-sensitive industries also dragged the market lower as perceptions that higher rates will curb spending took precedence over better-than-expected earnings from Hewlett-Packard Co., a major computer maker.

The Dow Jones industrial average fell 17.15, to 3,828.05, after tumbling as much as 36.33 earlier yesterday and rising 18.84 Wednesday. General Motors Corp., Walt Disney Co. and Eastman Kodak Co. led yesterday's retreat.

Broader indexes relinquished yesterday's gains as well. The Standard & Poor's 500 index slid 2.05, to 463.57, after climbing 0.59 Wednesday. The S&P general retail index tumbled 1.32, to 45.05; the S&P regional bank index dropped 2.65, to 162.53; and the S&P auto index shed 4.66, to 204.33.

The Nasdaq composite index broke a three-day advance, dropping 3.80, to 765.84, as losses in Microsoft Corp. and Oracle Corp. outweighed a gain in Tele-Communications Inc.

Two shares fell for every one that advanced on the New York Stock Exchange. Trading was brisk, with about 323 million shares changing hands on the Big Board.

Retailers were the biggest decliners amid concern that higher rates could lead to less consumer spending, which accounts for about two-thirds of the U.S. gross domestic product, traders said.

Banking companies, meanwhile, were buffeted by signs that rising interest rates will shrink profits and the value of banks' securities investments.

Among retailers, Wal-Mart Stores Inc. fell 87.5 cents, to $22.50; .. Woolworth stock shed 12.5 cents, to $14.875; J. C. Penney Co. eased $1.75, to $46.125; Sears, Roebuck & Co. lost 37.5 cents, to $49.875; and Kmart Corp. fell 31.25 cents, to $14.875.

The drop in retailers came in the face of profit increases reported by Wal-Mart, the nation's largest retailer, and Woolworth Corp., another discount chain. Wal-Mart's third-quarter earnings rose 13 percent and Woolworth's third-quarter profit improved upon a year-earlier loss.

Bank shares were the second-biggest decliner in the S&P 500 after retailers. Citicorp fell $1.125, to $44; Chemical Banking Corp. fell 75 cents, to $35.625; and BankAmerica Corp. fell 75 cents, to $40.375. Banc One Corp. fell 37.5 cents, to $26; NationsBank declined $1, to $46.50; Wells Fargo & Co. fell $2.25, to $142.125; and First Interstate Corp. dropped $2.875, to $72.375.

Signs that higher rates may already be taking a toll on the economy surfaced yesterday in the form of a report on October housing starts. Construction of new homes declined a larger-than-expected 5.2 percent last month, the first drop in four months, as higher financing and mortgage rates took hold.

"The Fed's tightenings are beginning to be felt," said Joseph Liro, chief economist at S. G. Warburg & Co. To be sure, Mr. Liro and others said it's premature to attribute the slowdown solely to the Fed's actions.

"If that were the case, the bond market wouldn't be down," said Mabon's Mr. Clark. More important, the surge in yields on Treasury securities strengthens the case for fixed-income investments over stocks, traders said.

The yield on the government's 30-year bond jumped as high as 8.17 percent yesterday and ended at 8.12 percent.

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