FINANCIAL MARKETS : Stock Investors Join Pessimists; Bond Yields Up

Stock investors joined the bond market in pessimism Thursday, pushing prices lower even as the financial world got good news on U.S. inflation and the economy.

The 30-year bond closed at 8.15%, up from 8.09% on Wednesday.

The Dow Jones industrial average fell 17.15 points to 3,828.05. The blue-chip index lost as much as 36 points at one juncture, then trimmed its losses after trading in bond futures closed.

Declining issues outnumbered advancers by nearly 2 to 1 on the New York Stock Exchange.

The Federal Reserve Bank of Philadelphia said its index of regional business activity and index of prices fell in November, indicating good growth with moderate inflation, analysts said.

But the Philadelphia survey also shows increases in employment and the average workweek, and most indications of future economic activity rose. Those components were taken as a signal that inflation might be looming.

On Thursday, there was other evidence of moderate inflation. The Commerce Department said housing starts fell 5.2% in October, the first drop in four months. And the Labor Department said first-time unemployment claims dropped by 5,000 last week.

All of that should have been good news for stocks, but they were held hostage to a bond market that still fears higher rates, said Larry Wachtel, market analyst at Prudential Securities.

“As long as the Fed’s in your face and there’s no sign of a peak in rates, stocks really can’t make a major move on the upside,” Wachtel said. “But so long as the economy’s good enough to support profits, there will be no major move on the downside, either.”

Bond market participants said major sellers of U.S. government bonds included large holders of mortgage-backed securities seeking to hedge, or offset, potential losses with gains from Treasury securities.

“The fact we couldn’t rally on good news forced traders to sell into continued weakness,” said Eric Hamilton, another market analyst at Technical Data.

Analysts also traced the market slump to a “calendar effect.”

“It has been a horrible year, and over the past several weeks money managers have been raising cash and lessening exposure to the market so they are simply not responding to good news,” said Ward McCarthy, managing director of Stone & McCarthy Research Associates Inc. in Princeton, N.J. “They want to end the year in a defensive posture.”

Among market highlights:

* Banking and financial stocks fell as analysts worried that rising interest rates could squeeze margins. Citicorp fell 1 1/8 to 44, BankAmerica declined 3/4 to 40 3/8 and Nationsbank lost 1 to 46 1/2.

* Auto stocks and many cyclical issues lost ground on the premise that higher interest rates could choke off economic growth. Chrysler fell 1 1/4 to 49 3/4. General Motors slipped 1 1/8 to 38 1/2 and Ford lost 3/8 to 28 3/8.

* Overseas stock markets were mixed. The Nikkei in Tokyo rose 0.2%, but the DAX in Frankfurt lost 0.4% and London’s FT-SE fell 0.60%.

* Lumber prices retreated from recent sharp advances, pressured by an unexpectedly large drop in housing starts last month and the prospect of even higher mortgage rates. The lumber market had jumped 15% in the past week.

January lumber fell $4 to $349.50 per thousand board feet at the Chicago Mercantile Exchange, retracing part of this week’s $47 rally.