Dow Spends Day on Roller Coaster, Closing Off 16.26

Stocks rebounded from a major selloff Tuesday, boosted by bargain hunting in late trading, but closed lower for the fifth straight session.

The late recovery came after the Dow Jones industrial index slid to the 2,500 level in a wave of selling that erased 60 points by early afternoon. It then bounced back 45 points to close at 2,545.12, down 16.26.

The bond market also tumbled, with the Treasury’s key 30-year bond falling more than $16 per $1,000 in face amount.

“The (stock) market just got tired of going down,” said Hildegarde Zagorski, a market analyst for Prudential-Bache Securities.

The late rebound seemed to affirm a widely held view that the bull market is going through a correction, traders said.

Declining issues outstripped advancers by about 8 to 1 on the New York Stock Exchange.

Interest Rates Climb

Volume on the Big Board totaled 242.8 million shares, up sharply from 129.07 million in Friday’s session. The financial markets were closed Monday in observance of Labor Day.

Friday’s hikes in the discount rate and the prime rate were reflected Tuesday in steeply escalating interest rates on bonds in the open market. Higher interest rates are negative for stock prices, since they tend to discourage company investment.

“Certainly you’d expect a reaction in the short term to the rise in interest rates,” said Mary Farrell, vice president and market analyst at Paine Webber.

The Fed raised its discount rate to 6% from 5.5% in a bid to help the faltering dollar. The key rate, the interest the Fed charges on loans to U.S. financial institutions, had not been lifted in more than three years.

The Fed’s move was copied by major banks across the country, which raised their prime lending rate by a half percentage point to 8.75%, the highest level for the prime since March, 1986.

Analysts said many market watchers anticipate that the Fed will raise the discount rate again if preliminary figures for July, due to be published Friday, show another discouraging picture of the nation’s trade deficit and force the dollar lower.

“There’s a lot of nervousness; there’s a lot of fear,” said Monte Gordon, vice president and director of research at Dreyfus Corp. “The expectation is, we have not finished this whole sequence” of potential increases in interest rates.

Among actively traded issues on the NYSE, Pacific Gas & Electric slipped 1/8 to 19 7/8, AT&T; declined 7/8 to 32, General Electric was down 1/8 at 59 1/2, IBM dropped 3 to 157 3/4, Pepsico eased 1/8 to 37 7/8, USX lost 1 to 33 3/4, Philip Morris fell 1 3/4 to 111 3/8 and Mobil declined 1 5/8 to 48 3/8.

One of the few bright spots, GAF Corp., soared 12 to 66 3/4, buoyed by its announcement that it had received a proposal for a buyout of the company led by members of management.

Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 273.46 million shares.

The NYSE’s composite index fell 1.99 to 175.59.

Standard & Poor’s index of 400 industrials fell 3.84 to 366.30, and S&P;’s 500-stock composite index was down 3.14 at 313.56.

The Wilshire index of 5,000 equities closed at 3,093.013, down 38.576.

At the American Stock Exchange, the market-value index was down 7.29 at 347.13. The NASDAQ composite index for the over-the-counter market closed at 437.60, down 8.88.

In the bond market, investors were concerned about higher inflation as yields on long-term government debt securities hit the highest level in 21 months.

“You have more sellers than buyers, that’s a simple way of putting it, but that’s what happened today,” said Robert Fagan, head of municipal bond arbitrage at Thomson McKinnon Securities in New York.

The yield on the Treasury’s 30-year bond rose to 9.63% from 9.47% on Friday, the highest since early December, 1985.

The federal funds rate, the interest on overnight loans between banks, traded at 7.25%, up from 6.75% late Friday.