Dow plunges 235 points on rate fears

Possible Fed action to keep inflation in check a concern

`Too much uncertainty'

Index's largest loss since March

Nasdaq declines 8 percent

May 28, 1999|By Bill Atkinson | Bill Atkinson,SUN STAFF

The Dow Jones industrial average spiraled downward yesterday to its largest loss since March, on fears that the Federal Reserve will raise interest rates at its next meeting to slow down the economy and keep inflation in check.

The Dow Jones industrial average sank 235.23 points, or 2.2 percent, to 10,466.93. The sharp decline came a day after the bellwether index of 30 blue-chip stocks rose 171 points Wednesday. The Dow still is up 14 percent for the year, but has fallen 5.8 percent since it reached a record 11,107.02 on May 13.

"The market is nervous," said Richard O'Brien, head of fixed income trading at Folger Nolan Fleming Douglas Inc., a Washington-based brokerage firm. "There is too much uncertainty out there. The direction and momentum seems to be to higher rates."

A decline in bond prices spurred the Dow's drop, experts said, sending the yield on the benchmark 30-year bond to 5.84 percent, nearing its highest level for the year.

The stock market "was all about interest rates" yesterday, said Hugh A. Johnson, chief investment officer, at First Albany Corp.

He said investors have become increasingly nervous and are taking money out of the market.

"Hardly a day goes by that I don't get a call from some client asking me if it is time to take some money off the table," he said. "It is a very edgy investor almost hair-trigger sensitive."

A Commerce Department report released yesterday helped push the market lower. Although it said the country's economic growth in the first quarter wasn't as strong as originally expected, consumer spending soared, growing at an annual rate of 6.8 percent -- the fastest increase since 1988.

GDP up 4.1 percent

The report said that the gross domestic product -- a broad measure of the nation's economic output -- was up 4.1 percent in the first quarter, compared with initial projections of 4.5 percent.

The report also said that corporate profits were higher in the first quarter, boosted in part by consumer spending.

"That should have been good news," Johnson said. "The profit numbers were great."

Alfred Goldman, chief market strategist at St. Louis-based A. G. Edward & Sons Inc., said it would be a mistake if the Fed raises interest rates when it meets in June.

Ten days ago, the Fed said it was poised to raise interest rates if the economy continued to accelerate. That way it could hold down inflation and keep the world's strongest economy rolling.

"We see no fundamental, no politically correct reason to do it," Goldman said. "There are already signs that the economy is slowing its rate of growth down."

Goldman said that if the Fed raises interest rates, it could hamper recoveries in Asian countries, which are beginning to resolve their economic problems. "For us to raise rates would cause a real problem for our friends across the seas," he said.

Much broader stock market indexes also fell yesterday. The Standard & Poor's 500-stock index slipped 23.35 points, or 1.8 percent, to 1,281.41. The Nasdaq composite index, dominated by large technology companies, fell 8.03 points to 2,419.15. For the year, the S&P index is up 4.24 percent; the Nasdaq is up 10.33 percent.

Elsewhere on the broad market, the Russell 2,000 index, a benchmark of small-cap stocks, fell 2.49 to 432.92; the Wilshire 5,000 index sank 169.39 to 11,799.39; the American Stock Exchange composite index dropped 8.27 to 744.39; the New York Stock Exchange composite index declined 10.12 to 614.02; and the S&P 400 midcap index slid 0.12 to 393.76.

The Sun-Bloomberg Maryland index lost 0.25 to 189.37.

Almost twice as many stocks fell as gained on the New York Stock Exchange, where about 829.7 million shares traded.

Holiday may be factor

Goldman said yesterday's wild swing could have been nothing more than the fact that many traders were already out for the Memorial Day holiday. "Whenever you get a thin audience you get exaggerated moves -- wham, bam, in either direction," he said.

A question analysts are debating is whether stocks are heading for a bear market, which is defined as a sustained decline of more than 20 percent.

Johnson doesn't think it's moving in that direction. He says this latest downturn is a normal move to cool off a hot market.

"It is not the start of a bear market," Johnson said. "But hang on, [the Dow] may be another 5 to 10 percent [down.]" Hopefully, we get it over with pretty soon."

Among individual stocks:

Wells Fargo Co. fell $2.125 to $39.25; Bank One Corp. dropped $2.75 to $54.9375; and Bank of America slipped $3.50 to $62.50.

Minnesota Mining & Manufacturing Co. fell $2.8125 to $86; Caterpillar Inc. lost $2.4375 to $55.375; and AlliedSignal Inc. slid $2.5625 to $56.75.

Exxon Corp. fell $3.125 to $78.8125; Royal Dutch Petroleum Co. New York skidded $2.75 to $55.3125; and Mobil Corp. slid $3.375 to $99.6875.

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