Stocks post biggest decline in six weeks Caution follows news Fed may not cut interest rates

NEW YORK — NEW YORK -- U.S. stocks posted their biggest drop in six weeks yesterday as investors grew less optimistic that interest rates will tumble and profits will surge in 1996.

After three straight record days, the Dow Jones industrial average and Standard & Poor's 500 index dropped as shares of banks -- among the year's best performers -- retreated. Some investors decided that this year's stock market rally has been built on lofty profit expectations that may not be met.


The Dow industrials slid 39.74, to 5,159.39, the biggest drop since a 49.86-point slide Oct. 26.

Before yesterday's drop, the 30-stock average was up 2.5 percent for four days -- eclipsing its 2.1 percent gain for all of 1994.


Shares of Caterpillar Inc., Boeing Co., General Motors Corp. and Aluminum Co. of America led the decline, helping push the average down as much as 50.58 points and triggering the New York Stock Exchange's "uptick" rule, which limits some computer-guided trading in an attempt to stabilize the market.

The S&P; 500 also retreated from a record, sliding 4.01, to 616.17. It was the index's first drop in five days and the biggest one-day decline since its 5.75-point slide Oct. 26. Shares of bank, drug, utilities and telephone companies led the descent.

By selling bank and other interest rate-sensitive stocks, investors expressed less confidence that the Federal Reserve will lower interest rates Dec. 19.

The Nasdaq composite index fell 8.56, to 1,053.17, its third straight drop after registering a record 1,069.79 Monday.

It was the index's biggest drop since Nov. 20. Shares of America Online Inc., 3Com Corp., Amgen Inc. and U.S. Healthcare Inc. fell the most.

About three stocks fell for every two that advanced on the New York Stock Exchange, where some 381.5 million shares traded hands, slightly above the three-month daily average of 365 million.

One company that said earnings won't meet expectations was Comdial Corp. Shares of the telecommunications equipment company fell $1.0156, to $7.75, after it said fourth-quarter earnings will be about half the amount analysts expected.

After rallying for eight days, bank shares retreated on concern that the Fed won't cut the federal fund rate by 50 to 75 basis points, as some investors expected.


Federal Reserve Gov. Susan Phillips suggested yesterday that the Federal Reserve may not cut interest rates when its policy-making committee meets on Dec. 19.

Among financial stocks, Citicorp fell $2.50, to $70; Chemical Banking Corp. slid $2.375, to $60; BankAmerica Corp. dropped $2, to $66.50; and First Fidelity Bancorp slid $1.875, to $77.75.

Shares of Internet-related companies fell. Microsoft Corp. unveiled a surprise strategy to grab the Internet market by augmenting its best-selling personal computer software with competitors' products.