Fear of Fed causes biggest stock fall in six weeks

January 20, 1995|By Bloomberg Business News

NEW YORK -- U.S. stocks posted their biggest losses in six weeks yesterday as a slumping dollar and a bearish reading on inflation heightened expectations that the Federal Reserve will raise interest rates at the end of the month.

"Sentiment has just done a 180-degree turn," said William Allyn, managing director in equity trading at Jefferies & Co. A week ago, stocks staged their broadest advance since July because a poor retail-sales report got people thinking a rate increase was unlikely.

The bond market was also hammered. The yield on the government's 30 1/4 -year bond ended at 7.82 percent, up from 7.77 percent Wednesday.

Stocks most sensitive to rising rates, such as banks, brokerages, insurance companies and electric utilities, were among yesterday's biggest decliners.

The Dow Jones industrial average slid 46.77, to 3,882.21. It fell as much as 50.47, triggering the New York Stock Exchange's "uptick" rule curbing stock-index arbitrage for the first time in six weeks.

It was the Dow's biggest one-day loss since Dec. 8, when it plummeted 49.79 amid concern that Orange County, Calif.'s bankruptcy could herald more financial instability.

Yesterday's slump sliced off much of the 71.66 points, or 1.9 percent, the average had gained since last Thursday. On Monday, that rally saw the Dow industrials come within 50 points of its record close before retreating. That high was set last Jan. 31, just before the Fed began raising rates on Feb. 4.

Caterpillar Inc., Goodyear Tire & Rubber Co. and General Electric led yesterday's decline.

Broader indexes also shed some of the past week's 2 percent advance. The Standard & Poor's 500 index fell 2.76, to 466.95. The Nasdaq composite index, down for the first time in six days, fell 3.83, to 768.55.

Stocks retreated as concern mounted that higher interest rates will hurt future corporate profits. At the same time, a raft of companies released lower-than-expected quarterly earnings, among them General Electric Co., Bear Stearns Cos., Bankers Trust New York Corp., Kimberly-Clark Corp. and General DataComm Industries Inc.

Twice as many stocks fell as rose on the New York Stock Exchange. Trading on the Big Board was about 314 million shares.

"The market's just sliding away," said Jim Benning, a trader at BT Brokerage Inc. "The weak dollar is just one more argument for the Fed to raise."

Stock prices fell to the day's lows late in the day, after the dollar slid to a 10-week low against the German mark on an unexpected widening in the U.S. trade deficit in November. That raised the prospect of the Fed raising rates to bolster the currency.

Also yesterday, the Federal Reserve Bank of Philadelphia said more manufacturers in its region reported higher prices for raw materials in December than November, an indication that inflation is picking up.

It was the third Fed report that suggested more rate increases may be needed to slow the economy and corral inflation. In Wednesday's Beige Book report, the Fed called the U.S. economy "vibrant," and a report Tuesday showed the nation's plant-use rate was at a 15-year high.

Those events restored expectations that the central bank's policy panel will vote for higher rates when it meets Jan. 31 and Feb. 1.

Concern about rates was compounded by more evidence that rising rates already are taking their toll on corporate profits.

Insurance stocks were also weak. American International Group Inc. fell $2.25, to $101.125. AIG, one of seven U.S. insurers licensed to directly sell insurance in Japan, yesterday said it expects $50 million in losses from the Japanese earthquake. Travelers Corp. fell 87.5 cents, to $34.875.

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