Dow Falls 21.22 as Early Rally Fades Quickly : Inflation Fears Outweigh Favorable Trade Report

Stock prices dropped sharply in the final hour of trading Tuesday as concern over higher interest rates outweighed news of a much improved U.S. trade performance.

The Dow Jones industrial index closed 21.22 points lower at 1,986.41. New York Stock Exchange volume totaled only 133.85 million shares, after 155.01 million the day before.

In composite NYSE trading, declines outnumbered advances by nearly 2 to 1.

“If it goes down on good news like this, wait until we get the bad news,” said Bill Lord, a trader with Shearson Lehman Hutton.

The March deficit announced by the government Tuesday slimmed to $9.75 billion, sharply lower than the $11.5 billion to $12 billion that was expected.

In February it was $13.83 billion.

Interest rates on credit markets surged to the highest level of the year, as bond prices fell sharply. Concern grew that higher exports indicate stronger-than-expected economic growth, which could overtax industrial capacity and boost inflation.

“The market thrives on moderation and sinks on prosperity,” said Larry Wachtel of Prudential Bache Securities.

Bear Market Mentality

Just one month ago, the unexpectedly high trade deficit for February set off a 101-point plunge in the Dow industrial index.

But the dramatic improvement in the trade deficit for March failed to ignite a rebound; instead, it indicated an economy that is improving too quickly and possibly overheating--bad signs for stocks and bonds.

“We are in a bear market mentality. There is no joy in Mudville,” said Dan Murphy, a trader with C. J. Lawrence Inc.

The pessimism was apparent in bond markets as well, where prices slid and interest rates on government bonds rose to near the highest level of the year.

“It looks like all the speculators jumped into the market yesterday in anticipation of good trade numbers today,” said Thom Brown, analyst with Butcher & Singer. The Dow ran up 17 points at the close Monday, partly in anticipation of a good trade report.

The trade numbers, showing gains in both exports and imports, fanned concerns that the economy is too robust. Concern over inflation was heightened this week as a broad range of agricultural commodity futures surged in value.

“The bottom line is that rates are going up and the stock market is already overpriced relative to bonds,” said trader Jon Groveman of Ladenburg Thalmann & Co.

Wall Street “was hoping that a good trade number would be its salvation--would reverse the upward trend in bond yields,” Groveman added.

Within minutes of the opening bell, however, the bond market lost all of its opening price gains and slipped below a key support level. That selling quickly spilled into the stock market.

Traders said the bond market’s weakness at the close will likely bring additional selling today.

Among the most active NYSE issues, Texaco rose 1/2 to 49 3/8 on reports of talks between the oil giant and takeover strategist Carl C. Icahn, its largest shareholder, aimed at averting a fight for director seats.

Price of Cray Skids

Losing blue chips included IBM, which dropped 1 1/2 to 110 1/8; Philip Morris, which slipped 1 3/4 to 82 1/2; Alcoa, which lost 7/8 to 44 1/2, and AT&T;, which retreated 3/4 to 26 1/2.

Cray Research fell 5 1/8 to 76 3/4 on word that some Wall Street analysts had lowered their earnings projections and investment rating for the company.

Nationwide, consolidated volume in NYSE-listed issues, including trading at regional exchanges and on the over-the-counter market, totaled 156.45 million shares.

The NYSE composite index fell 1.56 to 144.65.

Standard & Poor’s index of 400 industrials fell 3.85 to 296.71, and S&P;’s 500-stock composite index fell 3.32 to 255.39.

The Wilshire index of 5,000 equities closed at 2,551.896, down 24.597.

At the American Stock Exchange, the market value index fell 1.39 to 296.57.

The NASDAQ composite index for the over-the-counter market closed at 372.27, down 1.08.

The Nikkei 225-share index finished at 27,819.98, for a gain of 60.11, on the Tokyo Stock Exchange.

Prices also finished higher on the London Stock Exchange, helped by the U.S. trade deficit report. The Financial Times 100-share index closed up 12.6 at 1,789.2.