NEW YORK -- Most U.S. stocks declined yesterday after
TC report showing September manufacturing activity was stronger than expected bolstered expectations that the Federal Reserve soon will raise interest rates to cool inflation.
Semiconductors paced the retreat after a profit warning from Advanced Micro Devices Inc., a computer chip maker whose stock was the most actively traded yesterday.
"We've had the view the economy is too strong for the Fed, and this report confirms that view," said Jeffrey Applegate, chief investment strategist at CS First Boston Corp. Mr. Applegate expects the central bank to raise interest rates by 50 basis points in November.
In addition to making fixed-income securities more attractive, rising interest rates hurt stocks because they increase corporate borrowing costs and threaten future earnings growth.
Stocks didn't fall more because the strength in factory output bodes well for manufacturers' earnings and shares, traders said.
That expectation helped the Dow Jones industrial average overcome early losses. The average closed up 3.70, at 3,846.89, led by Aluminum Co. of America and Goodyear Tire & Rubber Co. The average rose as much as 8.74 initially, then fell as much as 17.16 before computer-guided "buy" orders bolstered prices.
Aloca gained $1.125, to $85.875, and Goodyear rose $1.125, to $34.50.
The National Association of Purchasing Management yesterday reported its manufacturing index, a barometer of activity in the nation's factories, climbed to 58.2 in September from 56.2 in August.
"This report would be good for names like Alcoa and Goodyear," said Todd Clark, senior director in equity trading at Mabon Securities Corp. "We're getting right back to the earnings vs. rates argument. With the NAPM index as high as it is, people are thinking the deeper cyclical companies are going to report impressive earnings."
The Standard & Poor's 500 index fell 0.97, to 461.74. The index gained as much as 0.60 initially, then fell as much as 2.38, to 460.33, after the NAPM report.
The Nasdaq combined composite index, led by Intel Corp., declined 3.41, to 760.88. Intel dropped $1.25, to $60.25, and Advanced Micro Devices stumbled $3.25, to $26.50, after AMD told analysts that price cuts on microprocessors could hurt fourth-quarter earnings. Micron Technology Inc. slid $2.125, to $32.375.
Two stocks fell for every one that rose on the New York Stock Exchange. Trading was moderate, with about 278 million shares changing hands on the Big Board.
Concern about rates might recede as companies begin to release third-quarter earnings. "It's what we're all waiting for," said Phillip Tasho, a portfolio manager who oversees about $150 million for Shawmut Investment Advisers in Boston. "The bond market's still scared about all the strength out there in the economy, while investors in the stock market are waiting to see how good earnings are going to be."
The NAPM said its separate price index rose to a six-year high of 77.1 in September, from 74.5 in August. That was the highest reading for the price index since August 1988.
"As important as the ongoing strength exhibited by the NAPM index was the increasing stress it is putting on prices," said Joseph Liro, chief economist at S. G. Warburg & Co.