Higher Interest Rates Push Dow Down 91 Points

Fears of lower corporate profits and an economic slowdown caused by higher interest rates sent stocks plunging Tuesday, with the Dow Jones industrial average plummeting 91.52 points for its biggest one-day drop in 10 months.

Many investors sold stocks in favor of earning an attractive and steady return on government-backed bonds and certificates of deposit--a trend that, if continued, could be ominous for the stock market, analysts said.

“People are thinking this is a good time to be playing it safe,” said James Solloway, research director at the investment firm Argus Research Corp. in New York.

The Dow Jones average of 30 industrial stocks plunged to 3,677.99 on Tuesday, giving the widely watched index a two-day decline of 137.27 points, or 3.6%, and pushing it to its lowest level since July 6. Many other market indexes also fell sharply Tuesday.

The loss was the Dow average’s worst single-day setback since it fell 96.24 points on Feb. 4, the day the Federal Reserve began lifting short-term interest rates in an effort to brake the economy’s growth and curb inflation.

The central bank has raised lending rates five times since then, most recently a week ago. Those actions, in turn, have led to rising savings rates as well as higher borrowing costs.

And those higher rates took most of the blame for the latest selling wave that shook Wall Street. The rates have made yields on government bonds, money-market funds, bank certificates of deposit and other fixed-income investments--many of which are government insured and hence risk-free--increasingly appealing relative to stocks.

“There’s too much competition from the fixed-income market,” said Peter Canelo, chief market strategist at NatWest Securities in New York.

That competition was evident in the bond market Tuesday, where investors sharply bid up prices of the Treasury’s bellwether 30-year bond by more than 1 point, or $10 for every $1,000 in face value. That dropped the bond’s yield to 8.01% from 8.12% late Monday. The bond had yielded less than 6% in late 1993.

“You have to work hard to earn 9% on stocks each year, and along comes Uncle Sam with 8% for 30 years,” Canelo said.

The climb in interest rates sparked heavy stock selling for another reason: There’s a consensus building among investors that the higher rates spell trouble for the nation’s economic growth and hence corporate earnings, analysts said.

Indeed, while stocks of all stripes were hammered Tuesday, those that are particularly sensitive to an economic downturn--such as auto, paper and chemical stocks--were among the hardest hit even though their most recent profits have been robust.

Companies such as Chrysler, Dow Chemical and International Paper all lost 1 1/2 points or more.

A. Gary Schilling, who runs an investment firm bearing his name in Springfield, N.J., said other factors made stock investors skittish Tuesday, including comments by Sen. Robert C. Byrd (D-W.Va.), who joined Republican conservatives in urging postponement of a vote on a new global trade accord.

Byrd said the pact, negotiated under the General Agreement on Tariffs and Trade, should be taken up next year in the Republican-controlled Congress rather than during next week’s session of the lame-duck Congress still led by Democrats.

But Schilling said investors are mainly concerned that the Fed’s interest rate actions will halt the economy’s expansion.

“We’re seeing all the signs of an impending recession,” he asserted, noting that some Fed efforts to ratchet up rates ultimately stifled economic growth. But even if a recession is not on the horizon, “the market is sensing that (corporate) earnings aren’t going to hold up,” he said.

Which is all the more reason why investors are tempted by the yields they now see on government bonds and other fixed-income investments, analysts said.

The stock market’s session Tuesday mirrored Monday’s activity in that much of the decline came in the final 90 minutes of trading, when high-volume computerized selling by Wall Street’s big investment houses exacerbated the market’s declines.

That arcane but influential practice, called “program trading,” often is triggered when investment firms buy or sell stocks to take advantage of price differences between complex futures and options contracts and the actual stocks.

On both days, the computerized selling prompted the New York Stock Exchange to restrict program trading once the Dow Jones industrials had lost 50 points.

But whereas that “circuit breaker” helped halt the market’s slide Monday, it couldn’t keep stocks from tumbling further Tuesday. The Dow Jones industrials, for instance, plunged 35 points in the final 12 minutes alone.

That last-minute dive indicated selling pressure on stocks was coming from much more than technical factors related to program trading and signaled a sharply growing sentiment among all types of investors to shed stocks, several analysts said.

The Dow’s loss Tuesday left the blue-chip indicator with a 76-point loss for the year to date. But many broader measures of the market, which already were sporting declines for 1994, came under continued selling pressure as well.

The Standard & Poor’s 500-stock index fell 8.21 to 450.09, and the Nasdaq composite index--populated with many of the nation’s smaller firms--plunged 16.53, or 2.2%, to 741.21.

Argus’ Solloway said the Dow’s decline is “only catching up with what’s been happening to the broader market” in recent weeks.

“In retrospect, that (broader decline) was a sign that there would be trouble with the widely watched averages” such as the Dow, he said. “The troops were leading the generals.”

* MARKET HIGHLIGHTS: A closer look at the stock market’s decline. D1