Stock prices pulled back and bond yields rose Tuesday as optimism over Germany's interest rate cuts dissipated around the globe.
The dollar, however, managed to hold on to its gains, as currency traders warily eyed the weakened German mark.
The Dow Jones industrial average fell 48.90 points to close at 3,327.32, after soaring 70.52 points on Monday--the year's biggest gain.
Stocks also dropped sharply in London, where the Financial Times-100 index lost 52.1 points to 2,370, completely erasing Monday's 51.2-point gain.
Early today, Japanese stocks continued the trend as the Nikkei index fell 526.70 points to 17,944.70 by midday.
The catalyst for Monday's rallies--the first German interest rate cut since 1987--looked far less impressive by Tuesday, analysts said. Though the German cut is likely to help bring down rates across Europe and set the stage for better global economic growth next year, investors see the potential for more economic turmoil in the interim.
"Everything was great Monday, but now reality is setting in," said Jeff Landle, a manager at Twenty First Securities in New York.
In the latest indication of renewed weakness in the U.S. economy, the government said Tuesday that retail sales fell 0.5% in August, much worse than the 0.1% decline analysts had anticipated.
At the same time, the government reported a 0.3% rise in consumer prices in August. While modest, it was stronger than many bond traders had expected.
That helped raise inflation fears, fueling a small selloff in the bond market. The yield on 30-year Treasury bonds rose to 7.31% from 7.25% Monday.
Many stock traders, suspicious about Monday's big Dow surge anyway, cued on the rise in bond yields and bailed out.
"I just thought it was way overdone Monday," said Robert Bacarella, manager of the $290-million Monetta stock mutual fund. He has been gradually selling stocks in recent months and continued to sell Monday and Tuesday, he said.
Like many investors, Bacarella believes Germany's rate cuts will be beneficial in the long run. But his immediate worry is the U.S. presidential election. "My big concern is that whoever gets in will try to make changes (in the economy) too quickly next year," potentially throwing the stock and bond markets for a loop, Bacarella said.
Thus, he sees no reason to bet heavily on the stock market now.
That attitude appeared to reign from the opening bell on Wall Street Tuesday. Stocks fell from the start, and near the close the Dow was off as much as 52 points before rebounding slightly.
Losers outnumbered winners 13 to 5 on the Big Board, where volume totaled 219 million shares, down from 253 million Monday.
Globally, German stocks held up best on Tuesday, perhaps because the German economy has the most to gain from lower interest rates there. Frankfurt's DAX index eased just 7.49 points to 1,587.55 after soaring 67.24 points Monday.
Among U.S. market highlights:
Big computer makers provided yet more evidence of the weak economy. Amdahl, a mainframe computer company, plunged 5 1/4 to 9 3/4 on the American Stock Exchange. Late Monday, the company announced that demand for its computers was coming in far below expectations this quarter.
The fallout on Tuesday hit IBM as well, as its shares tumbled 2 7/8 to 85 1/2. Several analysts cut earnings estimates for IBM, even though the firm said it was too early to tell whether third-quarter mainframe orders would be disappointing.
Stephen Smith, analyst at Paine Webber, said Amdahl's woes may illustrate an "underlying theme" for high-tech companies in general, which is that corporate customers are reluctant to spend big money on equipment in the current economic environment.
* Among other tech companies, Intel fell 1 3/4 to 63 3/4, Apple lost 1 1/4 to 48 1/4 and Digital Equipment sank 1 5/8 to 38. After the market close, software firm Adobe Systems added more gloom by reporting sharply lower quarterly results and saying it is "cautious" going forward.
* Many industrial stocks that had jumped Monday gave back part or all of their gains. Alcoa sank 2 to 68 1/4, International Paper lost 1 3/8 to 65 7/8, USX-U.S. Steel fell 1 1/8 to 25 1/2 and Ford eased 1 to 41 7/8.
* Airlines also were hit. Delta lost 1 3/8 to 55 1/8, British Airways fell 2 3/4 to 50 1/2 and AMR, parent of American, dropped 1 3/8 to 58 3/4.
* Video Lottery slumped 8 3/4 to 24 5/8. The maker of video lottery terminals said it expects lower quarterly earnings on a smaller-than-expected number of orders.
Bond yields rose across the board, though not dramatically.
Though the August consumer prices report weighed on the market, analysts said Tuesday's action also was driven by simple profit taking after the slide in yields Monday, following Germany's interest rate cuts.
Kevin Flanagan, economist at Dean Witter Reynolds in New York, said there is a feeling hanging over the market that the United States, Japan and Germany might take more steps to stimulate global growth--which could boost inflation in the short run.
Bond yields in the United States and Japan have fallen sharply over the past year in large part because investors have expected the global economy to remain weak, leading to further interest rate declines. But a strong effort to stimulate the economy could raise the demand for money and thus boost rates.
The fed funds rate, the rate on overnight loans between banks, was unchanged at 3.188%.
The dollar continued to gain against the German mark in volatile trading that was buffeted by rumors of a new conflict with Iraq.
In New York the dollar ended at 1.492 marks, up from 1.482 Monday. But it had fallen as low as 1.465 marks in the morning.
Against the Japanese yen the dollar closed at 124.35, up from 124.30 Monday.
The dollar may have been helped by rumors that an American plane was downed over Iraq. But a U.S. Air Force officer said he had no reports of a downing.
International turmoil typically sends traders into dollars for safe haven reasons.
Meanwhile, there was more bad news for the British pound, as traders largely dismissed Monday's Germany interest rate cut as too little to help Britain's economy.
The pound hit an all-time low against the German mark since joining the European Exchange Rate Mechanism in October, 1990, currency dealers said, touching 2.780 marks. Its ERM floor is 2.778.
"It's back to square one. We are no better off than where we were on Friday," said Nigel Richardson, economist with SG Warburg.
The Italian lira, devalued by 7% in the European deal that included Germany's rate cut, was also hit by a fresh crisis of confidence in the Italian economy. The Bank of Italy had to intervene on foreign exchange markets to prop up the lira.
Fears of a killing frost next week in the Midwest boosted corn and soybean futures prices on the Chicago Board of Trade.
Corn for September delivery settled 2.25 cents higher at $2.26 a bushel. September soybeans climbed 7 cents to $5.62 a bushel.
Meanwhile, on the New York Comex, October gold slipped 40 cents to $346.90 an ounce after jumping $5.90 Monday on inflation jitters. September silver rose 3.5 cents to $3.81.
Oil futures retreated on the New York Merc with light, sweet crude for October falling 13 cents to $22.18 a barrel.
* GLOOMY ECONOMIC REPORTS
Retail sales fell sharply in August and the trade deficit ballooned. Consumer prices rose modestly. D2