Dow Sheds 64 as New Data Push Yields Above 7%

Fresh evidence of a just-won’t-quit U.S. economic advance pummeled stock and bond markets Thursday, as investors feared higher inflation and the likelihood of a Federal Reserve Board interest-rate hike.

The Dow Jones industrial average slumped 64.73 points, or 1.1%, to 5,647.65, in the biggest one-day drop since mid-July.

In the bond market, the yield on the bellwether 30-year Treasury bond jumped from 6.98% Wednesday to 7.03% Thursday, the first breach of the 7% level since late July.

Although trading was light with many investors away on vacation this week, analysts said the continuing rise in bond yields over the past two weeks is threatening to slam Wall Street’s bull market again--just as in July, when yields surged and stocks took their worst tumble since 1994.

“Seven percent [on T-bonds] creates psychological problems and a legitimate competitor for money,” said Ralph Bloch, chief technical analyst at brokerage Raymond James.

What’s more, if the Fed moves to raise short-term rates to brake the economy and keep growth on an even keel, money market funds and other short-term accounts also will present stronger competition for stocks, experts warn.

The central bank’s decision to begin tightening credit in February 1994 led to a sharp stock market pullback that spring.

Thursday’s economic reports, showing higher-than-expected July home sales and an unexpected upward revision in second-quarter economic growth, don’t necessarily cement the idea that the Fed will raise rates, but the news led more investors to “give up on the idea that the economy is slowing in the third quarter,” said Hugh Johnson, strategist at First Albany Corp.

Although stock investors naturally want the economy to expand, they fear too-rapid growth because of the implications for inflation and interest rates.

On Thursday, the Dow fell as much as 80 points as bond yields jumped, although the blue-chip index recovered somewhat by the close of trading.

In the broad market, losers outnumbered winners by more than 2 to 1 on the New York Stock Exchange. But most major stock indexes fell less than the Dow in percentage terms.

The Nasdaq composite index of mostly smaller stocks dropped 8.85 points, or 0.8%, to 1,145.03.

Traders said some investors also were unnerved by the resignation of Dick Morris, President Clinton’s top political advisor, in a sex scandal. Morris is credited with having moved Clinton more toward the center in his policies.

The stock market’s big test will come next week, analysts said, as investors return from vacation and decide whether the risk of a Fed rate hike warrants bailing out of stocks, at least for the near term.

Among Thursday’s highlights:

* Interest-rate-sensitive stocks were hit hard, with the Dow utility index losing 1.2% to 216.32. Among financial issues, NationsBank lost 7/8 to 92 3/8, J.P. Morgan fell 1 1/8 to 88, Wells Fargo dropped 3 7/8 to 248 7/8 and Travelers lost 1 to 44 1/4.

* Among the Dow stocks, profit-takers pulled Procter & Gamble down 2 1/8 to 89 3/4, Merck down 1 1/4 to 66 1/2 and GE down 1 5/8 to 84 3/4.

* Centocor slumped 3 1/4 to 33 1/8. Oppenheimer & Co. raised questions about a key study involving the biotech firm’s leading drug.

* On the plus side, Baxter International jumped 2 1/2 to 45 3/8 on news that it would acquire Immuno International over three years in a deal worth $715 million.

* Among Southland issues, HMO Wellpoint Health leaped 2 1/8 to 30 on new takeover rumors. Also, hazardous-waste-disposal firm International Technology gained 1/4 to 2 1/4. The Carlyle Group investment firm said it will buy $45 million of new IT preferred stock, gaining control of IT’s board.

In foreign trading, Mexican shares slumped 2.2% to 3,334.90 after new rebel attacks in two southern states.

Market Roundup, D6