Stock Prices Plunge; Dow Off 36.97 : Rekindled Inflation Fears, Profit Taking Hurt Market

Renewed fears of higher interest rates and inflation--along with a bout of profit taking--sent the stock market reeling Friday in its biggest decline of the year and raised worries that the robust rally of 1989 may have run out of steam.

A bigger-than-expected jump in producer prices, along with hikes in banks’ prime lending rate, help push the Dow Jones industrial index down 36.97 points to close at 2,286.07. That was the Dow’s largest single-day decline since Nov. 16.

The drop, representing a decline of 1.6%, was broadly felt among other issues, as declining issues outnumbered advances on the New York Stock Exchange by more than 4 to 1. Big Board volume totaled 173.56 million shares, down from 224.22 million in the previous session.

Analysts said the drop was initially triggered by a government report released Friday morning suggesting that inflation is higher than earlier believed. The report by the Labor Department showed that producer prices--involving finished goods at the manufacturer level--jumped 1% in January. That was the sharpest rise since October, 1985, and at least twice economists’ estimates.

The rise promptly raised fears that the Federal Reserve Board would continue to boost interest rates--possibly including its all-important discount rate on loans to member banks--in a bid to cool the inflation surge. Perhaps responding to that fear, several major banks on Friday raised their prime lending rate to 11% from 10.5%.

Bonds Sold Off

“Many people think a discount rate boost is coming and with the prime rate boost, that added gas to the fire,” said Norman Mains, director of research at the Los Angeles brokerage of Bateman Eichler, Hill Richards Inc.

Investors also responded to the new interest rate fears by selling off bonds, raising their yields, which will in turn add further upward pressure on interest rates.

Analysts also said investors were disappointed by President Bush’s speech to Congress on Thursday night, saying that it was short on specifics on how to cut the nation’s bulging federal budget deficit. Lack of action on the deficit will fuel further upward pressure on interest rates, economists say.

Analysts also said investors were ripe to cash in profits after the Dow had risen some 8.2% so far this year, through Tuesday. After hitting a post-crash high of 2,347.14 on Tuesday, the Dow has fallen 2.6%, including a drop of 20.17 points on Thursday. For the week, the Dow lost 45.18 points.

Investors also may be pulling some money out of stocks and putting it into short-term bonds, which are yielding close to 9%.

“When you can earn a risk-free 8.5% in Treasury bills, why break your back to try to get 12% in the market?” said Peter G. Eliades, publisher and editor of Stockmarket Cycles, a Los Angeles newsletter.

Light Volume Cited

Analysts differed on whether the market would soon resume its upward advance, or whether more declines were ahead. But some bullish experts took heart in the fact that volume was relatively light.

“There wasn’t a stampede to get out of everything,” said Donna Hostetler, director of research at the Los Angeles brokerage of Crowell, Weedon & Co. She noted that prices for smaller stocks did not fall quite as much as the blue chip Dow industrials.

She also contended that stocks are still fairly valued by historical standards, noting that the price-earnings ratio (relation of stock prices to earnings per share) on the Dow was around 10, about half the levels before the October, 1987, crash. Also, pension funds and other institutional investors are still holding high levels of cash, she said.

With such factors, “it’s hard to get terribly negative,” Hostetler said.

But other market watchers contended that the market may have seen its best days for awhile. While stocks may rebound somewhat next week, prices overall are overvalued, newsletter editor Eliades said.

He noted that the Dow as a whole is selling at about 2.3 times its book value (the net worth of all the companies in the index). The Dow has reached those levels only twice in the past 60 years, once in 1928-29 and again in 1986-87, both periods just preceding a crash, he contended. A ratio of 1.5 is more normal, he added.

Broad Market Decline

“We are at or approaching a major top,” Eliades said, adding that he had instructed his subscribers on Thursday to get out of the market.

As far as the performance of individual NYSE issues Friday, 301 stocks rose, 1,233 fell and 446 were unchanged.

Losers among blue chips included International Business Machines, down 53 3/4; General Electric, down 3/4 at 46 3/4; American Express, down 1 1/4 at 30, and Philip Morris, down 1 3/4 at 107 1/2.

But Eastman Kodak, which has discussed cost-cutting plans, managed a 5/8 gain to 48 3/8.

Williams Cos. dropped 1 to 30 7/8. The company reported a $16.1-million loss for the fourth quarter.

V Band climbed 1 7/8 to 10 1/4 in the over-the-counter market. Thomas Feil, the company’s chairman, said he might consider an offer for the company’s stock in public hands.

As measured by Wilshire Associates’ index of more than 5,000 actively traded stocks, the market lost $31.94 billion, or 1.09% in value.

The NYSE’s composite index of all its listed common stocks dropped 2.12 to 164.01.

Standard & Poor’s industrial index fell 4.90 to 337.26, and S&P;’s 500-stock composite index was down 4.04 at 292.02.

The NASDAQ composite index for the over-the-counter market skidded 4.02 to 402.37. At the American Stock Exchange, the market-value index closed at 322.77, down 2.59.

The Tokyo Stock Exchange closed mixed in active trading Friday after a late rally propelled the Nikkei index to its sixth consecutive record high and seventh straight gain. The 225-share index rose 53.56 points to close at 32,131.99.

Prices fell sharply on the London Stock Exchange for the second consecutive day in what was described as a technical correction after the market’s sharp surge of recent weeks. The Financial Times 100-share index closed down 23.0 points at 2,056.1.