A sudden afternoon selloff in the bond market Tuesday pulled the rug out from under stocks' rally, leaving both markets modestly lower on the day.
The Dow industrial average, up 24 points to a record 4,108 in mid-afternoon, closed with a loss of 11.07 points at 4,072.61.
The bond market had been fairly calm until late in the day, when a report by the Johnson Redbook Service showed that national retail sales have been surprisingly strong recently.
That suggested that bond investors may have gotten overly optimistic about slower economic growth--a theme that has helped pull bond yields sharply lower in recent months.
The yield on the Treasury's 30-year bond jumped after the Johnson Redbook report was disseminated, closing at 7.44%, up from 7.39% on Monday. Shorter-term yields also rose.
"There's a pretty decent chance that we see a second wind in the economy coming from an improvement in consumer demand," said David Capurro, manager of $250 million in bonds at Franklin Resources in San Mateo. "If that in fact happens, we could get a surprise on the inflation front."
Any upturn in the economy--or upturn in inflation pressures--could send yields surging again, many bond traders warn. The 30-year T-bond yield had reached 8.15% last November, before evidence mounted that the economy was slowing.
In the stock market Tuesday, most broad indexes suffered only minor losses. The Standard & Poor's 500 index eased 1.07 points to 495.07.
Declining issues outnumbered advancers by about 11 to 9 on the Big Board, where volume was a hefty 367 million shares.
But the speed with which stocks sold off as bond yields rose worried some traders.
The market's rally in recent weeks already reflects hopes that economic growth will taper off, keeping interest rates low. So "if anything comes up to jeopardize that, you have an even greater reaction" in stock prices, said Joseph DeMarco, head of equity trading at HSBC Asset Management.
Among Tuesday's highlights:
* As bond yields rose, declines in interest-rate sensitive stocks set the market's tone. J.P. Morgan fell 1 1/4 to 59 3/8, Travelers lost 3/4 to 38 and Citicorp was off 1 to 42 1/4.
* Among industrial issues, Chrysler slumped 1 1/4 to 38 5/8 after its cars and trucks received poor quality ratings in a Consumer Reports magazine article.
* Many technology stocks, on the other hand, continued their recent rally. Micron Technology rose 1 1/8 to 74 7/8, Hewlett-Packard added 1 1/4 to 122 5/8, Novellus Systems gained 1 3/8 to 61 3/4 and Computer Sciences added 3/4 to 51 1/4.
But IBM was off 1 1/4 to 82 1/4.
* Among Southland issues, Sport Chalet eased 1/8 to 4 1/2. After the market closed the retailer warned that earnings for the fiscal year that will end March 31 will be below estimates.
In overseas trading, stocks finished higher in London and lower in Frankfurt. Financial markets were closed in Japan for a spring holiday.
In Mexico City markets also were closed for a holiday.