NEW YORK -- U.S. stocks lost ground yesterday, hurt most by falling telephone and auto companies, amid concern that interest rates will rise and corporate earnings will suffer later this year.
An unexpectedly strong report on fourth-quarter economic growth pushed the Dow industrials into a 60-point plunge in the first half-hour of trading, triggering New York Stock Exchange limits on stock-index arbitrage trading. Share prices later pared their losses as Treasury bonds and the dollar trimmed theirs and as oil and gold stocks recovered.
The Dow industrials, which reached a record 4,172.56 yesterday, closed down 14.87 yesterday, at 4,157.69. Aluminum Co. of America, DuPont Co. and Procter & Gamble Co. paced the early decline, which was broad as well as steep. By day's end, about four stocks fell for every three that rose on the New York Stock Exchange. Volume was 353 million shares.
Investors reacted to the Commerce Department estimate that the economy grew 5.1 percent in the fourth quarter, up from an earlier estimate of 4.6 percent and far above economists' forecasts. Faster growth raises the prospect of higher inflation, casting doubt on the idea that the economy will slow to a point where rates stay stable and corporate profits can continue to grow -- a so-called soft landing.
"Inflationary pressures are building up in the economy," said Paul BTC Secord, money manager at Independence Capital Management.
"The only place they're not showing up is in the consumer price index. Either operating margins will get squeezed hard and profit growth will collapse, or companies are going to have to pass along price increases," spurring the Federal Reserve to again lift rates to cool inflation, he said.
Higher rates slow the economy, raise consumer and corporate borrowing costs and make stocks less attractive in comparison with bonds.
Concern about inflation drove yields on benchmark 30-year Treasury bonds as high as 7.50 percent, from 7.41 percent Thursday. Yields ended at 7.43 percent. A weaker dollar aggravated such concerns: The currency tumbled against the German mark and reached a post-World-War-II low against the Japanese yen, giving back all of Thursday's gains.
The Standard & Poor's 500-stock index dropped 1.51, to 500.71, after falling as much as 5.91, as electrical equipment, food and computer software shares also declined.
The Nasdaq Composite Index eked out a 0.35-point gain, to 817.21, after sinking as much as 10.36. Cisco Systems Inc., Tele-Communications Inc., Bay Networks Inc., Pioneer Hi-Bred International and HBO & Co. all strengthened.
Telephone stocks retreated after the Federal Communications Commission yesterday approved a plan that will force the
nation's biggest local phone companies to cut the fees they charge long-distance companies by as much as $1 billion over the next year.
Ameritech Corp. fell 75 cents, to $41.25; GTE Corp. declined $1, to $33.25; SBC Communications Inc. slipped 62.5 cents, to $42; and Bell Atlantic Corp. eased 75 cents, to $52.875.
Automakers were the market's second-worst performing industry group after more than 12,000 workers at General Motors Corp. and Chrysler Corp. walked off the job at plants in Indiana in Michigan in disputes over keeping local jobs.
Ford Motor Co. dropped 87.5 cents, to $26.875; GM weakened 87.5 cents, to $44; and Chrysler fell 87.5 cents, to $41.75.
Amid the inflation concerns, gold stocks were the fourth best-performing group in the S&P; 500 yesterday. The S&P; index of six gold stocks rose as much as 6.93, to 240.01. Barrick Gold Corp. rose 37.5 cents, to $25; Homestake Mining Co. added 25 cents, to $18.50; and Santa Fe Pacific Gold Corp. rose 37.5 cents, to $12.625.
Gains in oil stocks, many of which see their overseas earnings grow as the dollar falls, helped the market recover. Amoco Corp. shares rose $1, to $63.625; and Mobil Corp. shares climbed $2.125, to $92.625.
For the quarter as a whole, stocks registered their biggest gain since the first three months of 1991. The Standard & Poor's 500 Index jumped 9.02 percent, the Nasdaq Composite Index surged 8.68 percent, and the Dow industrials gained 8.43 percent.