Stocks, Bonds Fall on Rate Fears; Dow Is Off 138

Stocks and bonds fell sharply Friday as robust economic news fanned fears that the Federal Reserve Board will raise interest rates next week.

The Dow Jones industrial average fell 138.88 points, or 1.89%, to 7,194.67. For the week, it was up 25.14 points.

Investors actually began bracing for some rough sailing after Thursday’s close, when Hewlett-Packard reported disappointing profit. Combined, HP and IBM accounted for 35 points of the Dow’s loss, and the technology-laden Nasdaq market fell 12.85 points to 1,340.73.

But the mood quickly worsened Friday morning when two new economic reports dealt a blow to the recent confidence that the pace of business activity is slowing enough to keep inflationary pressures under control.

The Dow has climbed about 940 points from its close at 6,392 on April 11 to Thursday’s record close of 7,333.55.

Alfred Goldman, technical analyst at A.G. Edwards & Sons, said the stock market also had to contend with a “double witching” expiration of individual and index options Friday, which often leads to volatility in the stock market.

Bond market interest rates rose sharply after the Commerce Department reported that housing construction jumped an unexpected 2.6% April. Meanwhile, a separate report revealed that consumer confidence is surprisingly strong.

The recent rebound in stocks and bonds was largely predicated on the hope that Fed policymakers, who meet Tuesday, won’t decide to fight inflation by raising the central bank’s interest rates again. A Fed rate hike in late March had sent the markets sliding.

Friday’s “numbers added a dose of uncertainty. Basically, traders and investors are repositioning for a possible Fed increase now,” said Russ Labrasca, senior vice president at Principal Financial Securities of Dallas.

As bond prices fell Friday, the yield on the 30-year Treasury bond rose from late Thursday’s 6.86% to 6.90%.

Analysts said stocks and bonds are locked in such a narrow range that it is all but impossible for stocks to go up if bonds fell.

The prospect of rising inflation makes bonds and other fixed-income investments less attractive, forcing down prices to improve the yield. Higher interest rates at the Fed or the bond market, meanwhile, hurt stocks by slowing consumer spending and raising company operating costs.

Declining issues outnumbered advancers by a 3-2 margin on the New York Stock Exchange in moderate trading.

The Standard & Poor’s 500-stock list fell 12.13 points to 829.75 and the NYSE composite index fell 5.21 points to 432.44. Both measures had closed at record highs on Thursday.

Smaller-company shares, which haven’t kept pace with the blue-chip rally, held up better against the selling pressures. The Russell 2,000 list of smaller companies fell 0.63 point to 365.28 and the American Stock Exchange composite index rose 3.25 points to 586.72.

Among Friday’s highlights:

* HP fell 6 1/8 to 52 3/4 as the NYSE’s most active issue. IBM, which earlier this week surged to an all-time high, fell 3 7/8 to 170. The Dow’s other big decliners included Procter & Gamble, down 3 to 130 5/8 and 3M, down 3 to 91 1/2. HP’s woes affected other computer-related issues. Intel fell 3 to 155 1/8 and Cisco Systems dropped 1 1/4 to 61 1/2.

Informix dropped 1 5/16 to 10 1/16 after reporting that it must refinance leases and raise cash to continue operations. Netscape tumbled 5 5/16 to 29 1/4 after warning of slower growth, as did PairGain Technologies, down 3 7/8 to 17 1/4.

* Banks, whose profit margins tend to shrink when rates rise, fell. Norwest declined 1 1/8 to 52 1/2, and Citicorp fell 4 1/8 to 117 1/4.

* Small companies tended to weather the day’s retreat better than large ones. Roper Industries rose 4 to 44 3/4.

Overseas, Tokyo’s Nikkei stock average rose 1.3%, Frankfurt’s DAX index rose 1.2%, and London’s FTSE 100 rose 0.3%.

Market Roundup, D4