The stock market fell steeply Tuesday in reaction to a weak dollar and bond prices, but most dealers welcomed the selloff as a much-needed rest from a lengthy rally that produced many overpriced shares.
The Dow Jones index of 30 industrials, which closed above the 2,700 mark for the first time on Monday, tumbled 45.91 to 2,654.66--its seventh-largest daily drop.
The losses were felt across the board. Declining issues outpaced rising stocks by more than 3 to 1 on the New York Stock Exchange, with 1,296 down, 393 up and 312 unchanged.
Big Board volume came to 198.40 million shares, up from 166.12 million on Monday.
Traders blamed sharp drops in the dollar and bond prices for Tuesday's market pullback. The dollar's weakness was largely a continuing reaction to Friday's trade report, which showed the nation's shortfall in its trade balance widening to $15.7 billion.
A weak U.S. currency makes dollar-denominated securities, such as stocks, less attractive to foreign investors. Lower bond prices mean a rise in interest rates, and that could increase the attractiveness of debt securities over stocks.
But traders said investors merely used the dollar as an excuse to sell following several weeks of sharp gains in stock prices, fed, in part, by a big appetite for equities by foreigners.
"I think it (the market) is overvalued, not just historically but relative to the alternatives, such as cash and bonds," said John D. Connolly, chairman of the investment committee at Dean Witter Reynolds.
Before Tuesday, the Dow industrial index--the best-known measure of market trends--had risen 804.62 points, or 42.44%, from the start of the year. On Monday, the index gained 15.14 points to climb to 2,700.57, one week after its first close above 2,600.
Stock prices started out sharply lower Tuesday and stayed that way for the rest of the session, with a slight rebound late in the session on bargain-hunting.
At one point, shortly after noon, the Dow index was down just over 65 points. The record daily loss was 86.61 points on Sept. 11, 1986.
Among the mostly actively traded blue chips, IBM was down 1 1/2 to 173, General Electric was down 1 1/2 to 63 5/8, AT&T; was down 3/4 to 34 and American Express was down 1 7/8 to 37 7/8.
Gillette Among Losers
Many oil stocks posted losses as oil futures prices were little changed from Monday's settlement levels after falling below $20 a barrel for the first time in nearly two months.
Atlantic Richfield was down 1 7/8 to 90 3/8, Amoco was down 1 5/8 to 78 7/8, Mobil was down 3/4 to 50 1/2 and Exxon was down to 97 1/2.
Gillette declined 5/8 to 42 1/2. Revlon made a proposal Monday to acquire the company for $47 a share in cash and securities.
The dollar's erosion in foreign exchange trading was also cited for the steep drop in bond prices, with the Treasury's bellwether 30-year bond plummeting 1 1/2 points, or about $15 for every $1,000 in face value. Its yield, which moves inversely to price, jumped to 8.94% from 8.79% late Monday.
Yields on three-month Treasury bills were up 6 basis points to 6.01%, according to Telerate Systems Inc, a financial information service. Six-month bills rose 7 basis points to 6.17% and one-year bills were up 3 basis points at 6.49%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, stood at 6.675%, down from 6.813% Monday.