NEW YORK -- Stocks dropped yesterday as more evidence of economic strength led to lower bond prices and higher interest rates.
"If people see the direction of interest rates is higher, they might keep their money in cash" or invest in fixed-income securities, said Michael Metz, chief investment officer of Oppenheimer & Co.
The Dow Jones industrial average closed 18.45 lower, at 3,775.88, breaking a string of three successive record closes. International Business Machines Corp., General Electric Co. and P. Morgan & Co. led the decline.
Among broader indexes, the Standard & Poor's 500 Index dropped 1.94, to 468.64, paced by utilities and banks. The index fell 0.36 Wednesday, the first time it declined in five sessions. The S&P; 500 set a record close of 470.94 on Tuesday.
Bucking the trend, the Nasdaq Composite Index climbed for the sixth consecutive session, adding 2.60, to 771.08. A rise in MCI Communications Corp. led the advance. The American Stock Exchange Market Value Index rose 0.39, to 472.55.
Nine stocks fell for every eight that rose on the New York Stock Exchange.
Trading was slower than usual, with about 194 million shares changing hands on the Big Board, down from an average of 214 million this week and 253 million last week. Many investors are off between the Christmas and New Year's holidays.
Stocks declined as Treasury bond yields jumped after two reports suggesting the economy was stronger than expected.
The Commerce Department said new-home sales in November increased to an annual rate of 807,000, the highest since April 1986. Also, the Labor Department said the number of Americans who filed first-time claims for unemployment benefits fell by 39,000 last week.
Those reports came on the heels of Wednesday's better-than-expected reports on the index of leading economic indicators and home resales in November.
The yield on the 30-year Treasury bond rose as high as 6.34 percent yesterday morning, up from 6.25 percent late Wednesday. It closed at 6.33 percent, the highest closing yield since Nov. 22.
"The bond market is taking it on the chin," said Kenneth Ducey, head trader at BT Brokerage. "Right now, what everybody sees is the economy is looking pretty good."
Investors are concerned that a stronger economy eventually will produce a rising inflation rate and temper demand for stocks, traders said.
"I think the bond market is going to start putting pressure on the stock market," said Anthony Dwyer, chief investment strategist at Sherwood Securities.
Utility shares, whose chief attraction is their dividend yields of 4 percent or more, were among yesterday's biggest decliners, reflecting concern that higher rates might make stocks less attractive compared with other investments.
The Dow Jones utilities average of 15 companies finished 0.92 lower, at 230.16.
"They pay out big yields, so they have to compete with the bond market," said Gerald Perritt, who manages a $50-million fund of small- and medium-sized stocks. What's more, as rates rise, so do interest expenses for utilities with a lot of debt.
Bank and brokerage stocks also dropped amid the rise in rates. The Standard & Poor's group of major regional banks fell 0.89, to 175.76; the S&P; money-center bank group declined 0.79, to 157.10; and the S&P; financial group closed down 0.24, at 53.47. Citicorp fell 12.5 cents, to $37.125; and Merrill Lynch & Co. eased 87.5 cents, to $42.25.
"It's time to stay away from interest-rate sensitive stocks," said Mr. Perritt. "Everything I've seen points to explosive growth, and that kind of environment is not great for interest rates."
J. P. Morgan fell 87.5 cents, to $69.75, after reports of possible losses at its Corsair Partnership L. P. tied to a $162-million investment in Spain's Banco Espanol de Credito, or Banesto. The Bank of Spain took control of Banesto on Tuesday.
MCI Communications gained $1.50, to $27, amid expectations that the nation's second-largest long-distance telephone services provider might announce a plan next week that could reduce the billions of dollars it pays local phone companies to complete its long-distance calls.
Arrow International Inc. advanced $1.50, to $22.50. The medical supplies company said fiscal first-quarter net income rose to 27 cents a share from 22 cents.