FINANCIAL MARKETS : Stocks and Bonds Hit by Robust Economy

From Times Staff and Wire Reports

New reports of unexpectedly strong economic activity resurrected fears of higher interest rates and sent stock prices tumbling and bond yields higher Thursday.

Some traders also said that worries about possible losses on Orange County’s huge investment fund--another victim of rising interest rates--reverberated in markets and raised concerns about the health of the financial system.

On Wall Street, the Dow industrial average slumped 38.36 points to 3,700.87, after having been down as much as 48 points late in the day. Broader indexes also plunged.


Traders said several rounds of high-volume computerized selling worsened the Dow’s losses. But they said the market’s negative tone was set by another rise in interest rates, as economic reports pointed to new strength.

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 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.”

In the bond market, the benchmark 30-year Treasury bond yield inched up only modestly on the news, to 8.01% from 8.0% on Wednesday.

But shorter-term yields continued their climb to 3 1/2-year highs. The yield on the three-month T-bill jumped from 5.72% on Wednesday to 5.77% on Thursday.


Investors are poised for more bad news today, when the government reports on November employment--considered the first important look at broad economic trends in November.

In the stock market, meanwhile, sellers swamped the market after two days dominated by bargain hunters. In the broad market, declining issues outnumbered advancers by 15 to 7 on the New York Stock Exchange and by 19 to 9 on Nasdaq. Trading was active.

A sharp drop in technology stocks dragged the Nasdaq composite index down 9.71 points to 740.61.

Analysts said the stock market’s growing problem is the fresh allure of short-term interest rates, such as on bank CDs. Those yields are drawing more investors away from stocks, threatening a sustained downtrend in share prices if for no other reason than lack of demand, some experts warn.

Among Thursday’s highlights:

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

Other losers included computer makers Dell Computer, down 3 5/16 to 39 3/4; Apple, off 1 1/16 to 36 3/16, and Gateway 2000, down 1 5/8 to 20 1/4. CS First Boston downgraded some of the PC makers, 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.

* Some retail stocks fell on surprisingly weak November sales figures. The losers were led by electronics retailer Best Buy, which plunged 11 3/8 to 32 7/8. Other issued falling included Wal-Mart, down 3/4 to 22 1/2; J.C. Penney, down 3 1/2 to 42 1/2, and Gap, off 3 to 32 3/8.

* Among industrial issues losing ground, International Paper sank 1 3/8 to 70 1/8, GM dropped 1/2 to 37 5/8 and Xerox slumped 2 to 96 1/4.

* 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, and general worries about financial fallout from the giant Orange County investment fund’s securities losses, helped depress stocks across the board late in the day.

Overseas, stocks also closed lower. In London, the Financial Times 100-share average fell 41.8 points to close at 3,039.6, while Frankfurt’s 30-share DAX was down 1.67 points at 2,046.59.


Tokyo’s 225-share Nikkei average ended the day at 19,013.60, off 62.02 points. Mexico’s market was closed for the presidential inauguration.

Among the few bright spots in Thursday’s markets: The dollar advanced broadly, hitting a seven-week high against the Japanese yen, buoyed by the strong economic reports.

In New York, the dollar was quoted at 99.34 Japanese yen, the highest level since Oct. 13, and 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.