FINANCIAL MARKETS : Stocks and Bonds Hit by Robust Economy

Unexpectedly strong economic activity that resurrected fears of higher interest rates sent stock prices tumbling and bond yields higher Thursday.

The Dow Jones industrial average closed down 38.36 points at 3,700.87, having lost as much as 48 points earlier in the session. Traders said several rounds of high-volume computerized selling worsened the blue-chip index’s losses.

In the broader market, declining issues outnumbered advancers by about 11 to 5 on the New York Stock Exchange on Big Board volume of 288.31 million shares, down from 200.48 million Wednesday.

A sharp drop in computer stocks pushed broad-market indexes lower. The Nasdaq composite index, which is heavily weighted with high-technology firms, plummeted 9.71 points to 740.61. The NYSE’s composite index fell 2.37 points to 246.04, and the Standard & Poor’s 500-stock index slipped 4.77 points to 448.92.

Stocks fell in tandem with bond prices after the National Assn. of Purchasing Management said its index of manufacturing growth rose to 61.2% in November from 59.7% the previous month. That was the highest reading since February, 1984, and stronger than analysts had expected.

In separate reports, the Commerce Department said Americans’ incomes surged 1.4% in October, and the Labor Department said first-time claims for state unemployment benefits dropped by 12,000 last week.

The benchmark 30-year bond fell nearly half a point earlier in the session and recouped most of those losses. The long bond’s yield ended up slightly: 8.01% from 8.0% on Wednesday. Its price, which falls when interest rates rise, lost 3/16 point, or $1.88 per $1,000 in face value.

But the stock market did not recover with bonds.

The data was “considerably stronger than people were anticipating,” said Robert Walberg, senior stock analyst at MMS International in Chicago. It indicates “that the economy remains robust, which increases the likelihood that the Federal Reserve (Board) will tighten (credit) down the road.”

The dollar advanced broadly, hitting a seven-week high against the Japanese yen, buoyed by the purchasing managers report that indicated the economy should run full-steam into 1995.

In New York, the dollar was quoted at 99.34 Japanese yen, the highest level since Oct. 13, up from 98.93 on Wednesday.

The U.S. currency also changed hands late in New York at 1.573 German marks, up from 1.569.

Stock investors worried that higher interest rates will continue to lure investors out of stocks and into fixed-income investments such as bonds. Higher rates could also curb consumer spending and crimp corporate earnings, which would eventually send stock valuations lower, analysts said.

Among Thursday’s highlights:

The market was pushed lower by a broad selloff in computer stocks, as concern mounted about Intel’s Pentium chips. Intel fell 1/2 to 62 5/8, extending Wednesday’s 2 3/8-point drop.

Dell Computer dropped 3 5/16 to 39 3/4, and Gateway 2000 slipped 1 5/8 to 20 1/4. CS First Boston downgraded the issues, citing potential expenses tied to the problem with Pentium chips.

Personal computer stocks were also hit by an announcement by Hewlett-Packard that it will cut prices on some PCs. Hewlett lost 2 5/8 to 95 1/8. IBM slid 1 1/8 to 69 5/8, while Apple fell 1 1/16 to 36 3/16.

* Merrill Lynch fell 1 1/2 to 36 1/2 on rumors--denied by the investment firm--that it has suffered large losses on investments involving Orange County. Some stock analysts said the drop in Merrill’s stock was generally depressing stock prices.

* Retailing stocks fell on weak November sales figures. Wal-Mart lost 3/4 to 22 1/2; JC Penney fell 3 1/2 to 42 1/2; Gap Stores slid 3 to 32 3/8.

Overseas, stocks closed lower. In London, the Financial Times 100-share average fell 41.8 points to close at 3,039.6. Frankfurt’s 30-share DAX was down 1.67 points at 2,046.59, and Japan’s 225-share Nikkei average ended the day at 19,013.60, down 62.02 points. Mexico’s market was closed for the presidential inauguration.