Stocks, Bonds Skid on Interest Rate Worries

Stock and bond markets took a fall Wednesday, as President Bush’s economic rescue plan was overshadowed by new worries that interest rates have bottomed.

The Dow Jones industrial average dropped 47.18 points, or 1.4%, to 3,224.96 in the biggest one-day setback since the 120.31-point drop last Nov. 15.

Meanwhile, the yield on the 30-year Treasury bond--a bellwether of long-term interest rate trends--jumped to 7.75% from 7.66% on Tuesday. The bond’s yield was at 7.39% just four weeks ago.

Investors dumped bonds Wednesday after hearing Federal Reserve Chairman Alan Greenspan’s testimony at his confirmation hearing before the Senate Banking Committee in Washington. Greenspan said “very subtle” signs of economic recovery have appeared and suggested that the Fed saw no need to reduce interest rates further from their current 27-year lows.

The remarks, while not altogether a surprise, were enough to spook some bond investors who fear that interest rates can only rise from here if the economy rebounds, Wall Street analysts said. That would make older bonds less attractive.

As Treasury bonds were dumped on the market Wednesday afternoon--sending yields up--stock investors also reacted badly. The Dow, up 5.14 points at 2 p.m. EST, tumbled quickly from there, spurred by computerized program trading.

There was some irony in the stock market’s slide, Wall Streeters noted: Early in the day, the market appeared to respond positively to President Bush’s State of the Union speech Tuesday, in which he promised steps to help the economy without massive new federal spending.

Yet when Greenspan suggested that the recovery has already begun, investors suddenly soured on stocks.

However, analysts also noted that the Dow exaggerated the market’s move: Declining issues outnumbered gainers only by 10 to 6 on the New York Stock Exchange, not a dramatic margin. And, although Big Board trading volume rose to 248.90 million shares from 217.09 million Tuesday, volume had been running at more than 280 million shares a day earlier this month.

Some experts said Wednesday’s market selloff was long overdue, given stocks’ sharp gains since late December, when the Dow was at 2,900. “When you go up 300 points in a month, you create instability,” said Michael Sherman, strategist at Shearson Lehman Bros. in New York. The market has become a tug of war between bargain hunters and investors eager to take profits on their gains, he said.

Robert Raney, chief investment officer for Los Angeles-based U.S. Trust of California, called Bush’s speech “positive” for the markets. “If we could get the capital gains tax cut--and that’s a big if--long term it would be a good thing for the economy,” he said.

But Alan Ackerman, analyst at Reich & Co. in New York, said Bush was “short on substance and long on rhetoric,” and said the market now is vulnerable to a further decline as investors weigh record-high stock prices against the prospect of a very slow economic recovery. “We’re in a high-risk zone now,” Ackerman said.

Among the market highlights:

* The Dow was hammered by big drops in Bethlehem Steel, off 2 1/4 to 13 3/4; Coca-Cola, down 1 7/8 to 71 1/2; GM, off 1 5/8 to 32 3/4, and Sears, off 1 1/2 to 40 5/8.

Also, Boeing tumbled 3 to 50 5/8 on rumors that United Airlines parent UAL will slash jet orders. UAL fell 2 5/8 to 139 3/8.

* Some high-tech stocks, up sharply recently, sold off. Sun Microsystems dropped 4 to 29 7/8 on a disappointing earnings report. Apple fell 2 to 63 1/4, and Compaq plunged 3 3/8 to 29 3/8.

* Despite the down day, some stocks that would benefit from Bush’s economic-stimulus plan rose. Home builders, for example, gained. Kaufman & Broad rose 1/2 to 21 1/2 and Centex added 3/8 to 49 3/8.

Some machinery makers also gained on hopes that a new investment tax credit could spur capital spending. Cummins Engine rose 1 3/4 to 57 3/4, Emerson Electric added 1/2 to 56 1/8, Harnischfeger gained 1/2 to 20 7/8, and Deere was up 1/4 to 50 1/2.

Also higher were engineering firms and highway construction firms, which could benefit from new infrastructure investment measures. Fluor rose 3/4 to 46 and Granite Construction added 3/4 to 31.

Overseas, Tokyo’s Nikkei average lost 28.26 points to 21,362.26. London’s Financial Times-100 index eased 5.5 points to 2,546.5, and Frankfurt’s DAX index slid 10.68 points to 1,672.40.

Currency

The dollar ended mixed in U.S. trading, weakened at first by disappointment over President Bush’s economic proposals but buoyed later after Fed Chairman Greenspan predicted a recovery.

In New York, the dollar closed at 1.602 German marks, up from Tuesday’s 1.599. The dollar fetched 125.65 Japanese yen, down from 125.70 yen late Tuesday.

Commodities

Commodity markets were mostly lackluster. On the New York Commodity Exchange, gold for current delivery fetched $356.10 an ounce, up 30 cents, while silver was 6 cents higher at $4.25.

Oil futures prices were lower in quiet dealings on the New York Mercantile Exchange, with light, sweet crude for March delivery dropping 28 cents to $18.89 a barrel.

Market Roundup, D8