NEW YORK -- U.S. stocks fell from record highs yesterday as a surprisingly strong reading on May factory orders called into question a hoped-for interest rate cut and sent bond prices lower. Shares of banks were among the biggest decliners.
Signs the economy isn't slowing mean the Fed has less reason to lower rates when its policy making panel meets in July. Many investors have bought stocks on the expectation that rates would fall, borrowing costs for businesses and consumers would decline and corporate profits would rise.
"What's disturbing people is the prospect that we don't get a rate cut in July and what that means for August or September," said Frank Cappiello, president of $1.2 billion-asset McCullough
Andrews & Cappiello. Expectations for a reduction in rates have already been priced into stock prices, he said.
The Dow Jones industrial average fell 3.8, to 4,585.84, after being down as much as 17.29 points at the open. For the week, the 30-stock average vaulted 75.05 points, or 1.7 percent, after posting rallies of more than 40 points on both Monday and Thursday. Yesterday's drop was led by Procter & Gamble Co., J. P. Morgan & Co., General Motors Corp. and McDonald's Corp.
Shares of Procter & Gamble fell $2, to $71.25, amid concern that a merger of two rivals would boost competition in the U.S. consumer products market. Kimberly-Clark Corp. and Scott Paper Co. are discussing a stock swap that would create a consumer products giant with more than $11 billion in revenue.
Among broad market indexes, the Standard & Poor's 500 index fell 1.36, to 549.71, after surging 7.09 to an all-time high of 551.07 Thursday, its biggest gain this month. Losses in the shares of banking, telephone and software companies offset gains in oil, semiconductor and retail companies.
The technology-laden Nasdaq composite index fell 1.22, to 938.87, after rallying 10.9 points, to a record 940.09, on Thursday. Yesterday's drop was only the fourth drop in the last 18 sessions. Gains in Sybase Inc., Cisco Systems Inc. and Intel Corp. offset losses in Microsoft Corp., Oracle Corp. and Adobe Systems Inc.
Adobe's stock fell $4.25, to $61.25, after the company said Thursday it intends to buy software maker Frame Technology Corp. in a stock swap valued at $500 million. Frame's shares rallied $3.25, to $30.
Stocks didn't fall further yesterday because money managers who have underperformed the stock market this year are trying to catch up, said Steve Mindnich, a trader at Jefferies & Co. As of June 15, only 232 of 1,714 diversified equity mutual funds tracked by Lipper Analytical Services Inc. had outperformed or equaled the return of the S&P; 500.
"Until proven differently, any pullback is seen as a buying opportunity," the trader said.
Paper stocks gained after speculation spread that Kimberly-Clark, which makes Kleenex tissues and Huggies disposable diapers, would absorb Scott Paper. The merged company would be the second-largest consumer products company in the United States.
Shares of Scott Paper rallied $1.125, to $48, after jumping $2.50 on Thursday, while Kimberly-Clark added $2.25, to $62.50, a day after posting a $1.25 advance.
Among other paper stocks, James River Corp. of Virginia rose 50 cents, to $27.375; Champion International Corp. jumped $2, to $54.50; Boise Cascade Corp. closed up $1, at $38.625; Union Camp Corp. rose 62.5 cents, to $57.25; and International Paper Co. climbed 25 cents, to $83.
The Russell 2,000 index of small capitalization stocks fell 0.35, to 284.02; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock exchanges, slumped 11.21 to 5389.65; the AMEX market value index fell 2.49 to 493.48; and the S&P; 400 midcap index fell 0.66 to 199.5.
The wavering opinion about interest rates took hold after the government said orders for big-ticket items like airplanes and refrigerators climbed a larger-than-expected 2.5 percent in May.
The report pushed the benchmark 30-year Treasury bond down 1/2, or $5 per $1,000 bond. The bond's yield climbed three basis points to 6.5 percent.
Concern that interest rates won't fall as fast as anticipated hurt the shares of banking companies, particularly. When rates fall, lending picks up and banks' profit margins expand.
Among the biggest decliners, NationsBank Corp. fell $1.125, to $56.25; Fleet Financial Group Inc. slid $1.125, to $37.25; Corestates Financial Corp. lost $1, to $34.875; Suntrust Banks Inc. dropped $1.375, to $58.25; J.P. Morgan closed down $1.50, at $71.50; and Mellon Bank Corp. slumped 50 cents, to $42.50.