NEW YORK -- Stocks plummeted yesterday as interest rates climbed for a fourth day, raising concern about the flow of mutual-fund investments into the stock market.
"This is the real Armageddon scenario," said Michael Metz, chief market strategist at Oppenheimer & Co. "The market is absolutely, entirely dependent on the mutual funds' money."
Higher interest rates make stocks, especially utilities' stocks, less attractive compared with fixed-income securities and cause concern that investors may pull out of stock mutual funds, or at least curb their enthusiasm for further purchases.
Moreover, stocks were buffeted yesterday by at least three waves of computer-guided sell orders, said Philip Smyth, an analyst at Birinyi Associates in Greenwich, Conn.
The Dow Jones industrial average skidded 35.77 points, to 3,661.87, after having sunk 53 points late in the day, triggering the New York Stock Exchange's "uptick" rule. Utility, telephone, oil, bank and semiconductor stocks led the decline.
"There's a lot of disappointment that the bond market can't rally at all," Mr. Metz said. Bonds have slid and interest rates have climbed in the past two weeks amid signs that economic growth is accelerating.
The Standard & Poor's 500 Index tumbled 5.42, to 463.02, its second straight decline, after having risen in the previous six sessions.
Declining stocks exceeded advancing issues on the New York Stock Exchange by a margin of about 3-to-1. Trading was active, with about 342 million shares changing hands.
Bonds tumbled in the wake of a chain of economic reports in the past two weeks that have pointed to faster economic growth, raising concern about inflation, which hurts the value of fixed-income investments. The Federal Reserve Board's "beige book" report yesterday showed that the economy is expanding.
The yield on the 30-year Treasury bond rose to 6.10 percent, from 6.05 percent Tuesday. The record low of 5.77 percent was set Oct. 15.
The threat to stocks is that stronger economic reports have inspired "reinflation fears" among bond investors, said Richard Ciardullo, head trader at Eagle Asset Management of St. Petersburg, Fla., which manages $6 billion in assets.
Semiconductor and other technology issues lost ground yesterday after an analyst at Kidder, Peabody & Co. said Micron Technology would suffer from lower prices for dynamic random access memory chips. Micron shares collapsed $5, to $40.75; Texas Instruments Inc. slid $5.875, to $60.125; Motorola Inc. dropped $3.875, to $99.375; Intel Corp. closed $1.875 lower, to $60.875; and National Semiconductor Corp. dropped $1.50, to $16.
As a result of the two-week-long rise in long-term interest rates, the Dow Jones utility average fell sharply yesterday, dropping 6.19, to 231.68, and bringing its decline since Oct. 13 to more than 9 percent.
Among the few advancing groups, drug and health-care stocks gained as Tuesday's Democratic losses in state and local elections led traders to conclude that President Clinton now faces a tougher task in passing health reform legislation.
The outcome of the elections boosted drug stocks because "it makes it more difficult to push any health-care package through," said Todd Clark, senior block trader at Mabon Securities. Since last year's presidential election, "every major contest has been won by Republicans," he said.
Among leading drug shares, Merck & Co. gained $1.125, to $32.875; Pfizer Inc. rose $1.375, to $63.625; and Eli Lilly & Co. advanced $1.125, to $55.375.