NEW YORK -- U.S. stocks tumbled yesterday as reports signaling a robust economy stirred concern that rising interest rates will choke profit growth and entice more money into higher-yielding Treasury securities.
"The fear of rising interest rates is very real," said James Solloway, director of research at Argus Research. "People think it's better to take 6 percent in cash equivalents than hang around for the 7 percent to 10 percent that might be gotten in riskier assets."
A slump in computer shares also took its toll as concern spread that a flaw in Intel Corp.'s Pentium microprocessor might hurt Christmas computer sales. A profit warning from Best Buy Co. and lackluster November sales from U.S. retailers added to the gloom.
The Dow Jones industrial average, battered by four rounds of computer-guided "sell" orders, plummeted 38.36, to 3,700.87, its lowest close in a week. International Paper Co. and Caterpillar Inc. led the drop. The average plunged as much as 48.79 yesterday.
The Standard & Poor's 500 index shed 4.77, to 448.92, paced by oil, electric utilities, retail and computer companies.
The Nasdaq combined composite index, depressed by Intel, Applied Materials Inc. and Dell Computer Corp., sagged 9.71, to 740.61. Intel fell 50 cents, to $62.625, and Dell, one of the two main sellers of Pentium-based personal computers, plunged $3.3125, to $39.75.
More than 12 million Intel shares changed hands, making it the most actively traded stock, followed by Best Buy. Best Buy sank $11.75, to $32.50, after the consumer electronics retailer said it expects third-quarter earnings to fall below Wall Street estimates.
Stock prices descended to the day's lows shortly before the close as reports swept the market that Merrill Lynch & Co., the nation's largest brokerage firm, may lose money as a result of bad investments made by the Orange County, Calif., government. Merrill stock fell $1.50, to $36.50.
"People are wondering how many other cities and counties are out there with these kinds of problems, and what firms are exposed," said Michael Schroeder of First International Asset Management, a Merrill Lynch bondholder.
Stocks were hurt by a series of reports suggesting vigorous growth will prompt the Federal Reserve to raise rates within the next two months, traders said.
The Commerce Department said Americans' incomes rose 1.4 percent in October, the biggest gain in eight months, fueling a 0.7 percent increase in consumer spending.
Also yesterday, the government said construction spending rose unexpected 0.9 percent in October, whereas analysts expected a 0.4 percent drop. And the National Association of Purchasing Management's monthly index of manufacturing activity rose to 61.2 in November from 55.9 in September, the highest since February 1984 and the 15th straight monthly gain.
"Frankly, my gut feeling is the Fed won't raise rates this year," though the possibility is enough to drive stock prices lower, said Peter DaPuzzo, senior managing director at Cantor Fitzgerald & Co. Rising interest rates threaten corporate profit growth and encourage people to buy Treasury securities, which yield about 6 percent to 8 percent.
Given the perception that rates will keep rising, the damage to stocks has already been done, some investors said. "People are looking for reasons to flee," said Michael Holland, a partner at Blackstone Group.
Intel's Pentium woes dragged other semiconductor and computer stocks down, even though the chip's flaw affects only complex mathematical calculations and Intel and some computer makers that use the chip said they will replace products if needed.
Gateway 2000 Inc., another big supplier of Pentium-based personal computers, dropped $1.625, to $20.25, and Applied Materials Inc. fell $2.50, to $45.375.