FINANCIAL MARKETS : Dow Hits High Despite Swing in Bond Yields

Blue-chip stocks rose Wednesday for a fourth consecutive session, ignoring a turnaround in the bond market that all but wiped out an early rally. But smaller stocks closed mostly lower.

On Wall Street, a late rally powered the Dow Jones industrials up 21.68 points to a record 5,199.13, the index’s 68th new high this year.

The Dow has risen a spectacular 35.6% this year, the best performance since the 38.3% gain in 1975--the year that followed stocks’ worst post-World War II bear market.

Stocks were buoyed early Wednesday by a rallying bond market after the government reported a decline in the index of leading economic indicators.

The report again boosted expectations for an official cut in short-term interest rates by the Federal Reserve Board.

But later Wednesday,, the Fed’s own “beige book” report on regional economic conditions halted the bond rally, as investors focused on anecdotal evidence of tight job markets in some regions. That raised concerns about higher wages ahead and potentially higher inflation.

Richard Hoey, chief economist at Dreyfus Corp., noted that Fed Chairman Alan Greenspan had recently raised the issue of wage inflation as a worrisome sign.

The 30-year Treasury bond yield, which fell to a 25-month low of 5.95% early in the day, surged back to close at 6.03%, off just slightly from 6.04% on Tuesday.

The beige book report is one of the last studies Fed members will ponder before meeting Dec. 19 to decide whether to ease credit--an event that has been almost unanimously anticipated on Wall Street, especially with optimism high about Congress and the White House reaching a balanced-budget agreement soon.

If Fed officials decide there is potential for inflation to revive in 1996, they may opt not to cut rates despite widespread economic weakness, some analysts warn.

Until the economy shows more signs of slowing, “the [bond] market’s way too high,” contends Andrew Brenner, senior trader at Nomura Securities International in New York. “We’re not ready for a sustained 5.9% bond.”

Some analysts say the bond market’s next move may hinge on the government’s November employment report, due Friday. If that report is stronger than expected, it could force the Fed to delay cutting rates--and could send bond yields rebounding.

But many Wall Streeters still believe the Fed will be forced to ease rates sooner than later. “Bond yields will drop in the next six months,” said Van Hoisington, who manages $2.7 billion at Hoisington Investment Management in Austin, Texas. “I expect we’ll see bond yields in the neighborhood of 5% before the rally ends.”

In the stock market, meanwhile, blue-chip issues appeared largely nonplused Wednesday by the bond market’s turnaround.

The Standard & Poor’s 500 index joined the Dow at a record, adding 2.50 points to 620.18. Winners edged losers 13 to 11 on the NYSE in continued heavy trading.

But smaller stocks again stumbled, led by technology issues. Losers topped winners 20 to 16 on Nasdaq, where the composite index fell 4.16 points to 1,061.73.

Analysts say the momentum in blue-chip issues, while powerful, is threatened by any further reversal in the bond market.

Among Wednesday’s highlights:

* Classic consumer growth stocks--often considered “safe haven” issues for jittery investors--continued to lead the market. Coca-Cola gained 2 to 79 3/8, Philip Morris added 1 1/8 to 90 7/8, Procter & Gamble jumped 1 1/4 to 88, Eli Lilly shot up 2 1/4 to 103 and Abbott Labs rose 1 3/8 to 41 3/4.

* Many bank stocks were also strong. Boatmens Bancshares gained 1 3/8 to 41 3/8, Barnett Banks leaped 1 3/8 to 61 1/8 and BankAmerica added 1 to 68 1/2.

* Some retailers advanced, including Home Depot, up 1 1/4 to 45 1/8; Circuit City, up 1 to 28 1/8; and J.C. Penney, up 1/2 to 48.

* Sellers continued to chip away at technology stocks, which until recently had been the market’s undisputed leaders in 1995. Apple Computer lost 3/4 to 38 3/4, FileNet dropped 1 5/8 to 42 1/2, Cabletron Systems sank 1 7/8 to 77 5/8, Computer Associates lost 4 1/8 to 63 3/4 and Ascend Communications slumped 6 to 67 1/2.

In the volatile Internet sector, Netscape fell 9 3/4 to 161 1/4, Spyglass dropped 4 1/2 to 110 and Uunet was off 5 1/4 to 66 3/8.

Weighing on Internet stocks, Microsoft has scheduled a conference today to discuss how it plans to make money on the Internet. Shares jumped 4 5/8 to 90 5/8.

* Hollywood Entertainment tumbled 53%, or 8 5/8 to 7 3/4, after a Forbes magazine article questioned the video rental company’s accounting practices. The stock was trading in the 30s in September.

In foreign trading, Japanese stocks rose to their highest levels since Jan. 19, boosted by buying of major electronics companies. The Nikkei-225 index surged 188.33 points to 19,067.86.

In U.S. commodities trading, lumber futures closed up $10 per January contract, the daily limit, at $282.80 per thousand board feet after Georgia-Pacific said it will temporarily close 14 softwood lumber mills because of high log costs and bloated inventories.