FINANCIAL MARKETS : Dow Rises 28 as Latin Stocks Tumble Again

U.S. stock and bond markets rallied Tuesday, even as Latin American markets plummeted in the wake of Mexico’s worsening financial crisis.

Analysts said U.S. markets are in part benefiting from a “flight to quality” as investors seek lower-risk alternatives to battered stocks and bonds of emerging markets.

The Dow industrials, continuing their December rally, gained 28.26 points to 3,861.69. Since Dec. 8, the Dow has risen 176 points, or 4.8%.

Most broader stock market indexes also rose Tuesday, though they trailed the Dow.

In the bond market, the yield on the 30-year U.S. Treasury bond fell to a three-month low of 7.76% from 7.84% on Friday, responding to a National Assn. of Realtors report that sales of previously owned homes fell in November to the lowest level in 17 months.

Experts say long-term bond yields have been declining as more investors have grown confident that the economy will slow in 1995, lessening the chances of higher inflation.

Expectations of a slowing economy are evident in the shape of the “yield curve,” which simply measures yields on bonds of various maturities. On Tuesday the yield curve “inverted”: Five-year Treasury note yields were 7.78%, compared to 7.76% on 30-year T-bonds.

Normally, the longest-term bonds pay the highest yields. An inverted yield curve often heralds a less-robust economy, as the Federal Reserve Board keeps shorter-term interest rates artificially high while the market lets longer-term rates fall.

Christmas sales reports from a number of retailers added to the sense that the economy is slowing: Sales were said to be less than expected in many regions.

The housing and retail sales data suggests that the Fed’s six interest rate increases this year may finally be having the desired effect on the booming economy, said Don Hays, investment strategist at Wheat First Butcher Singer.

In the stock market, a slower economy would be welcomed because it would relieve concerns about higher inflation and allow the Fed to show restraint in future rate hikes, potentially stretching out the economic expansion.

Yet some analysts noted that the broad market’s rally wasn’t as impressive as the Dow’s on Tuesday, suggesting continuing investor caution. Winners topped losers by just 12 to 10 on the New York Stock Exchange, and volume was a mere 211 million shares. Many traders are away for the holidays.

Still, as the December rally plows on, and as Mexico’s crisis dampens enthusiasm for Third World stocks, analysts say the chances are increasing that U.S. stocks could benefit from a windfall of new money in January.

Among Tuesday’s highlights:

* Latin American issues traded in U.S. markets dominated the losers’ list, as investors bailed out on the heels of continuing selloffs in the home markets.

Dollar-denominated Mexican shares were hit the hardest, in part adjusting to their lowered value as measured in pesos, following last week’s currency devaluation. Telmex plunged 2 7/8 to 37 3/4, Grupo Tribasa slid 2 5/8 to 17 1/4, Vitro plummeted 2 1/8 to 11 3/8 and Empresas ICA fell 3 5/8 to 15 3/4.

Among closed-end stock funds, Mexico Fund plunged 3 1/4 to 20, Brazil Fund lost 1 1/2 to 30 3/4 and Argentina Fund gave up 7/8 to 11 7/8. Most Latin stock markets dropped between 2% and 4% in local currencies.

* U.S. blue chips leading the Dow higher included Alcoa, up 1 to 85 1/8; GE, up 1 1/2 to 51 1/4; Caterpillar, up 7/8 to 55 1/4, and IBM, up 3/4 to 74 1/4.

* Software stocks led another technology rally. Sybase gained 1 1/8 to 51 3/8, Computer Associates added 1 to 48 1/4 and Oracle jumped 1 11/16 to 45.

* On the downside, many retail stocks fell on news of weaker-than-expected Christmas sales. Nordstrom slumped 3 3/4 to 40 1/4, Dayton Hudson plunged 3 7/8 to 68 7/8 and Wal-Mart lost 3/4 to 21 1/4.

In other foreign markets, Frankfurt’s DAX index added 12.14 points to 2,106.15, while Tokyo’s Nikkei-225 index eased 15.39 points to 19,711.36. London’s market was closed for a holiday.