Spurt in Interest Rates Ends Dow’s Record-Setting Run

Market Overview * Stocks retreated from their record highs Tuesday as a spike in interest rates gave investors an excuse to take profits.

* Treasury bond yields jumped on fresh evidence that the robust economic expansion of late 1993 continued into 1994.

* Silver prices rebounded sharply, and oil jumped again as cold weather gripped the East.

Stocks

After setting three successive all-time-high closes and surging 70 points, the Dow industrials fell 14.35 points to 3,964.01.

In the broader market, falling issues topped winners by 6 to 5 on the Big Board in continued heavy trading.

Alfred Goldman, analyst at brokerage A.G. Edwards, described the market’s decline as a normal pause after the recent sharp advance. The Dow surged 6% in January, while the Nasdaq composite, Standard & Poor’s 500 and NYSE composite indexes all rose about 3% for the month.

The catalyst for Tuesday’s selloff, analysts said, was the sudden rise in bond yields, which followed Federal Reserve Chairman Alan Greenspan’s warning Monday that short-term interest rates are poised to rise with the strengthening economy.

Stocks also may have been hurt by the departure of Fed Vice Chairman David Mullins, who announced his resignation Tuesday. Some investors may fear that President Clinton will replace Mullins with someone less committed to fighting inflation.

The market received little direction from overseas stocks. In Tokyo, the Nikkei 225-share average closed up 187.22 points at 20,416.34. But action stalled in Europe, where Frankfurt’s DAX index finished at 2,179.67, up 2.22 points, and London’s FTSE-100 index lost 10.3 points to 3,481.5.

Mexico City’s Bolsa index inched up 5.95 points to a record 2,787.32.

Among U.S. market highlights:

* Profit taking clipped Procter & Gamble, down 1 3/8 to 58 1/8; General Electric, down 7/8 to 106 7/8; Union Carbide, down 7/8 to 24 5/8, and 3M, off 1 3/8 to 105 7/8.

* Telephone stocks also sold off. Bell Atlantic fell 1 3/4 to 55, BellSouth dropped 1 3/4 to 59 3/4 and US West sank 1 3/4 to 42.

* Intel fell 5/8 to 64 5/8 after IBM late Monday waived its rights to manufacture Intel’s new Pentium chip and other future computer chips for its own use. IBM was unchanged at 56 1/2.

* Among companies reporting earnings, Eastman Kodak rose 1/8 to 44 1/4 after it reported fourth-quarter operating results in line with expectations.

Also, hospital management firm Humana rose 7/8 to 21 1/8 after reporting better than expected earnings.

But software producer Aldus tumbled 4 to 22 1/4. Its quarterly results were below some analysts’ expectations.

* Gap lost 1 3/8 to 40 7/8 after an analyst at Sanford Bernstein cut its rating on the retailer, citing the stock’s recent advance.

* Hotel and casino stocks jumped on positive reviews for many of the companies at a Montgomery Securities stock conference in New York. Hilton Hotels soared 3 1/4 to 67 1/4, Caesars World jumped 2 to 57 1/8, Circus Circus gained 1 3/8 to 38 3/8 and Promus rose 2 to 52 5/8.

Credit

The yield on the 30-year Treasury bond soared to 6.31% from 6.23% on Monday, and shorter-term yields also jumped.

The yield on three-month T-bills surged to 3.12% from 3.04% on Monday.

Analysts said investors may have had a delayed reaction to Greenspan’s warning that short-term rates will inevitably rise with the stronger economy.

Also, a new economic report confirmed that the economy is sailing along: The National Assn. of Purchasing Management said its index of business conditions rose to 57.7% in January from 57.1% in December.

Many economists had expected a 56% reading. An index that exceeds 50% indicates the manufacturing economy is expanding.

Particularly worrisome to bond investors was the potential for higher inflation in the survey, which found that the rate of manufacturers’ price increases rose in January for the second straight month to the highest level since November, 1990.

Bond investors worry about inflationary conditions because higher prices in the economy diminishes the value of long-term bonds.

Other Markets

The dollar dropped to its lowest closing level against the Japanese yen in two months, with traders still nervous about the apparent lack of progress in U.S.-Japanese trade talks.

In New York, the dollar finished at 107.70 yen, down from 108.63 on Monday.

Meanwhile, on the New York Comex, gold closed at $384.10 an ounce, up $2.50. Silver rocketed 15.5 cents to $5.28 an ounce, rebounding from a recent selloff.

Elsewhere, energy prices jumped to a two-month high as a lingering period of cold weather forecast for the eastern half of the nation was expected to further shrink supplies of heating oil and natural gas.

March crude oil futures soared 73 cents to $15.92 a barrel at the New York Merc, the highest closing price since Dec. 1.

Market Roundup, D6