Dow leaps before Fed meeting Index adds 100 points, but technology sector continues hard slide

March 25, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF Bloomberg News contributed to this article.

Technology stocks were clobbered yesterday, but blue-chip companies rallied on the eve of an important Federal Reserve meeting at which the board is expected to raise interest rates for the first time in more than two years.

The Dow Jones industrial average jumped 100.46 points to close at 6,905.25. The 30-stock index of large companies' stocks nearly regained the 130 points it lost last week amid fears that the Fed will boost interest rates today.

Industry experts expect Federal Reserve Chairman Alan Greenspan to nudge short-term rates up by at least a quarter point -- from 5.25 percent to 5.5 percent -- to keep a lid on inflation and take some of the steam out of the stock market. The Dow index climbed to a record high of 7,085 points on March 11. The Fed's action would be the first increase since Feb. 1, 1995.

Greenspan warned investors nearly a month ago that they may be overly confident that the stock market will keep climbing, and hinted that the central bank may be forced to raise interest rates.

The Dow fell more than 100 points in 11 minutes that day.

"What he is trying to do is deflate stock prices a bit," said John Sweeney, chairman of Falcon Asset Management, which has $10 billion under management and is a subsidiary of Baltimore-based USF&G Corp. "If you get a tightening of a quarter of a point this time, before year-end I wouldn't be surprised if you see two more" rate increases by the Fed.

Market watchers are more sober than a year ago.

Sweeney sees the Dow falling by as much as 10 percent this year.

"The increased volatility is giving me a real feeling that we are at a market high," he said. Don Hays, director of investment strategy at Richmond, Va.-based Wheat First Butcher Singer, is also calling for a 10 percent drop in the Dow beginning the second week in April because of expected weaker corporate earnings.

The Dow hasn't fallen more than 10 percent since 1990.

"We don't expect to see a decline for several weeks because we have had some pretty intense pain," Hays said.

Yesterday, he began advising clients who have money in aggressive accounts to convert a larger portion of their holdings to cash.

Previously, he recommended holding 10 percent in cash, 45 percent in stocks and 45 percent in bonds. Now, he is instructing them to have 30 per-cent in cash, 35 percent in stocks and 35 percent in bonds.

Hays doesn't see an extended downturn. After the market falls by 10 percent, it will start climbing yet again, he predicts.

Richard Cripps, market strategist with Baltimore-based Legg Mason Inc., said 50 blue chip companies are carrying the stock market, and smaller firms and technology businesses are suffering.

"That is an extraordinary divergence," Cripps said. "Those top 50 names have almost disconnected from the rest of the market."

Philip Morris Cos. led the Dow's advance, rising $4.25 to $115.75 after losing $17.625 last week.

While the Dow finished up, the Nasdaq composite index, heavily weighted with technology stocks, fell 11.43 points -- which represents 57 Dow points -- to close at 1,242.64. The Standard & Poor's 500-stock index was up 6.79 points to 790.89.

The Nasdaq has declined by 10.5 percent since it reached a high of 1,388.06 on Jan. 22.

Hurting the Nasdaq's performance, Microsoft fell $3.875 to $90.125 after saying it would delay the next version of Windows 95 software until 1998, missing the Christmas selling season. It was more unsettling news for investors who were told last week by Cisco Systems Inc. and 3Com Corp. that business was sluggish in January and February.

Cisco Systems fell $2.125 to $47.125 yesterday.

Texas Instruments Inc. dropped $2.125 to $75.25; KLA Instruments Corp. lost 25 cents to $36.50; Intuit Inc. slipped 75 cents to $25.25; 3Com dropped 37.5 cents to $32.75; and Parametric Technology Co. slid $1.25 to $47.875.

Broad market indexes were mixed. The Russell 2,000 index of small capitalization stocks fell 2.25 to 349.48; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock exchanges, rallied 33.37 to 7,501.44; the American Stock Exchange composite index dropped 3.28 to 587.94; and the S&P 400 midcap Index fell 0.59 to 259.33.

Some 1,340 stocks fell and 1,168 shares rose on the New York Stock Exchange, where 442 million shares changed hands.

Bank shares rose as some investors said that one rate increase by the Fed wouldn't be enough to keep lenders' profits from expanding this year.

The Keefe, Bruyette & Woods bank index rose 14.56 to 616.57. Citicorp rose $1.25 to $116.625; Chase Manhattan climbed $1.375 to $103.375; BankAmerica Corp. rallied $3 to $113.625; Banc One Corp. added $1.375 to $44.75; and NationsBank advanced $3 to $61.625.

Among the day's best performers was Lehman Brothers Holdings Inc., which rose 75 cents to $31.625. The securities company earned $1.16 a share in its first quarter ended Feb. 28, above the 91 cents expected. While earnings topped expectations, the pace of business could slow as interest rates rise, analysts said.

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