Dow Falls 20; Biggest Drop in Six Weeks : Volcker’s Cautionary Comments, Boost in Interest Rates Cited
The stock market took its biggest drop in six weeks Wednesday, giving up some of its recent dramatic gains.
Analysts said cautionary comments by the chairman of the Federal Reserve Board and an upswing in interest rates encouraged traders to cash in profits.
The Dow Jones average of 30 industrials, which had closed at new highs in each of the four previous sessions, fell back 20.52 points to 1,658.26. That stood as the biggest decline for the average since it dropped a record 39.10 points Jan. 8.
Volume on the New York Stock Exchange came to 152.03 million shares, down from 160.20 million on Tuesday.
No Major Changes
Analysts said traders were focusing their attention on testimony by Fed Chairman Paul A. Volcker before the House Banking Committee. Volcker told the legislators that the Fed hasn’t made any significant change lately in its monetary policy.
Brokers said that news might have been taken as a disappointment by traders who have been hoping for some overt move toward easier credit by the Fed, such as a reduction in the discount rate.
Volcker mentioned some points that he said argued against a discount-rate cut--among them the decline of the dollar in foreign exchange, which he maintained might soon increase inflationary pressures in the domestic economy.
Interest rates, which have been dropping sharply of late, rose moderately in the credit markets Wednesday.
Prices of long-term government bonds, which move in the opposite direction from interest rates, posted losses of to 1/2 a point, or $2.50 to $5 for every $1,000 in face amount. Some observers also said they believed that the stock market was due for a pause, on even the slightest provocation, after a rise of more than 175 points in the Dow Jones industrial average over the last four weeks.
Losers among the blue chips included International Business Machines, down 1 3/8 at 157 1/2; Procter & Gamble, down 2 3/8 at 65 1/2; Du Pont, down 1 at 69 5/8, and Sears, Roebuck, down 1 at 42.
Sellers also set their sights on mortgage, savings and loan and regional telephone stocks, which have been some of the biggest beneficiaries of falling interest rates.
In the financial sector, Federal National Mortgage fell 1 to 31, H. F. Ahmanson 3 3/4 to 64 1/2 and Great Western Financial 1 to 43 1/2.
Among the telephone issues, Bell Atlantic lost 2 3/4 to 111, Ameritech 2 3/4 to 110 and Pacific Telesis 2 3/8 to 86 5/8.
On the plus side, Aetna Life & Casualty rose 1 to 60 5/8. The company reported sharply higher operating earnings for the fourth quarter of last year.
Losers Edge Gainers
Declining issues outnumbered advances by about three to two in the daily tally on the Big Board. The exchange’s composite index fell 1.35 to 126.75.
Large blocks of 10,000 or more shares traded on the NYSE totaled 2,894, compared to 3,036 on Tuesday.
Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 178.97 million shares.
Standard & Poor’s index of 400 industrials dropped 2.86 to 242.03, and S&P;’s 500-stock composite index was down 2.69 at 219.76.
The Wilshire index of 5,000 equities closed at 2,267.295, down 20.369.
The NASDAQ composite index for the over-the-counter market slipped 0.27 to 352.09.
At the American Stock Exchange, the market-value index closed at 246.67, down 0.39.
In the bond market, municipal bond prices fell while corporate issues were mixed.
As bond trading got under way, the Commerce Department reported some strong housing figures, which caused bond prices to weaken in the early going.
The pace of new-home construction surged 15.7% in January, the biggest monthly increase since a 17% jump in housing starts in February, 1984.
Frequently, signs of robust economic activity depress bond prices because strong growth can increase inflationary pressures, spur credit demands and push interest rates higher. Bond prices generally move in the opposite direction of inflation and interest rates.
At a monthly auction, the Treasury sold $9.5 billion in two-year notes at an average yield of 8.02%, down from 8.17% at the last auction in January and the lowest yield since 7.93% at an auction in December. The Treasury received $22.3 billion in bids.
Government Issues Slip
In the secondary market for Treasury securities, prices of short-term governments finished the session off 3/16 point, intermediate maturities slipped 9/32 point to 5/16 point and long-term issues were down 1/8 point to point, according to the investment firm of Salomon Bros. The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, slipped 0.22 from late Tuesday to 112.11.
