NEW YORK -- U.S. stocks, led by financial-services issues, fell amid concern that a declaration of bankruptcy Tuesday by Orange County, Calif., could undermine confidence in U.S. assets.
"It makes you aware that there are people out there who don't know what they are doing, and by extension, you become less trustful of the market itself," said Trude Latimer, chief market strategist at Ferguson, Andrews & Associates Inc.
The Dow Jones industrial average fell 10.43, to 3,735.52, recouping about 15 points in the last half-hour of trading. Slumping shares of Caterpillar Inc., AT&T; Corp., Aluminum Co. of America and General Motors Corp. paced the decline.
Among broader market indexes, the Standard & Poor's 500 index slid 1.88, to 451.23, after being as low as 450.01. Losses in financial, telecommunications and auto companies offset gains in electrical equipment, gold, oil and paper stocks.
The Nasdaq combined composite index fell for a second day, losing 6.96, to 734.27. U S Healthcare Inc., Cisco Systems Inc. and Microsoft Corp. dropped the most.
Shares of major securities firms fell on the Orange County news. Yesterday, the county said its bankruptcy filing meant securities firms couldn't dispose of some $10 billion worth of securities used as collateral for loans to the county.
Among those firms were CS First Boston, Merrill Lynch & Co. and Morgan Stanley Group Inc., each of which lent the county $2 billion. Merrill Lynch's stock was downgraded to "neutral" at Smith Barney Inc. and fell $1.25, to $35. Morgan Stanley lost $1.625, to $56.875.
Declining stocks outpaced advancers by more than 2-to-1 on the New York Stock Exchange, where about 285.6 million shares traded hands as of 4 p.m. EST. That's below the three-month daily average volume of 299 million shares.
The S&P; gold index of five stocks, by contrast, climbed 5.20, to 206.17, closing at its high for the day. Gold stocks are a traditional haven in times of political or financial uncertainty.
Placer Dome Inc. gained 75 cents, to $19.875; American Barrick Resource Corp. jumped 62.5 cents, to $21.375; and Homestake Mining Co. rose 37.5 cents, to $17.125.
Also gaining were shares of paper and forest products companies. Mead Corp. rose 75 cents, to $46.875; Georgia-Pacific Corp. rallied $1.25, to $71.875; and Westvaco Corp. added 62.5 cents, to $35.50. Chip Dillon, an analyst at Salomon Bros. Inc., said a report from the American Forest & Paper Association today is expected to show the industry's overall capacity growth rate for the next three years to be around 1.9 percent, the lowest since 1976.
Reflecting the strain companies face to meet demand, Scott Paper Co. yesterday said it will raise prices 10 percent on its commercial brands in the United States. Besides benefiting from earnings growth, Mr. Dillon said, stock prices may get a boost from merger activity as companies acquire competitors to increase capacity, rather than take the time to build plants.
"That would get the stocks moving" even more, he said.
The Russell 2000 index of small capitalization stocks fell 2.04, to 240.17; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock markets, slid 20.94, to 4,449.97; and the AMEX market value index slipped 1.82, to 429.19.
A drop in U.S. Treasury bonds contributed to the overall decline in stocks, traders said. The benchmark 30-year bond fell about 1/2 , to yield 7.89 percent, up four basis points from yesterday. Bonds slid amid concern about brisk economic growth and the (( possibility that Orange County's bankruptcy will force the county to sell securities to raise cash.