Stock market recoils from robust economy Dow dives 157 points after Thursday's fall

THE BALTIMORE SUN

Perturbed by another report of strong economic growth and worried about corporate profits, investors dumped stocks again yesterday to complete the worst two-day drubbing for the Dow Jones industrial average since 1987.

The Dow, the stock market's most closely watched gauge, fell 157.11 points yesterday, or 2.3 percent, to close at 6,583.48. Other stock indexes plunged, too.

By itself, yesterday's Dow drop was the sixth-worst daily point decline ever. But the index also fell Thursday, the last time markets were open, by 140.11 points.

The two-day toll came to 297.22 points -- a 4.3 percent bite. And the Dow has declined 502 points, or 7.1 percent, from the all-time high of 7,085.16 reached March 11.

In percentage terms, the latest Dow dips are still gentle jaunts in the country compared with the air pockets the market hit in the late 1980s.

But the declines are a discomforting novelty for many investors who have enjoyed watching stocks triple since 1990. And they cemented what analysts said was likely to be the worst quarter for U.S. stock mutual funds in more than two years.

"We're in the midst of a correction," said Richard Cripps, market strategist with Legg Mason Inc., a Baltimore-based investment house. "The question is: What type of correction is it going to be?"

Stock prices may be retreating only to wait for corporate profits to catch up relatively soon, Cripps said -- a setback that might hit bottom at 10 percent or 15 percent below the March 11 peak. On the other hand, analysts said, if investors truly expect inflation and interest rates to keep heading higher, the damage could be much worse.

Several recent indicators "are straws in the wind that maybe the corporate earnings environment is getting tougher," said David Orr, an economist with First Union Corp., a Charlotte, N.C.-based banking company. Company profits appear to be "decelerating," Orr said, "and all it takes with the stock market is a little bit of change in psychology" to hurt prices.

Standard & Poor's index of 500 big companies fell 16.76 to 757.12 yesterday, and the Nasdaq composite index, home to many technology stocks, lost 27.81 to close at 1,221.70.

Commerce Department reports of healthy personal incomes and strong consumer spending helped send stocks down yesterday, especially a revision showing that spending ballooned by 1 percent in January.

Consumer outlays increased by a more modest 0.3 percent in February, but spending for the first three months of 1997 is on track to grow at an annual rate of more than 5 percent -- the fastest since early 1994, analysts said.

Why is that bad for stocks? With the economy growing quickly and people spending freely, the Federal Reserve may feel compelled to boost interest rates again to clip the inflation that often sprouts from robust economic activity.

Higher rates not only boost companies' cost of doing business; they also discourage customers from buying the companies' products. And higher rates can make bonds, certificates of deposit and other investments more attractive than stocks.

Faced with growing evidence of economic acceleration, the Fed moved to increase short-term interest rates by a quarter-percent a week ago.

The latest evidence boosts chances that the Fed will raise rates further when it meets again next month, analysts said.

"There's a lot of excitement right now," said Nathan Sax, a vice president with the investment unit of Mercantile-Safe Deposit and Trust Co. in Baltimore. "Basically, people understand that when the Fed tightens, they rarely do it [only] once. Durable goods. Consumer spending. Housing. They're all strong."

Volume on the New York Stock Exchange came to a hefty 564 million shares yesterday, but investment pros reported no massive selling by individuals.

"We're not seeing that many redemptions," said Steve Norwitz, spokesman for T. Rowe Price Associates Inc., the big, Baltimore-based mutual fund company. "We had a pretty muted reaction today, as far as I could tell."

At Alex. Brown & Sons Inc.'s Towson office, "I haven't had anybody call up and say, 'Sell,' " said broker Paul Sherry. Investors were more panicky in July, when technology stocks took a temporary tumble, he said. Now, he added, "people are more patient, willing to give a stock some room."

But neither were they swooping in to buy.

"There is no emphasis on buying," said Legg Mason's Cripps. "No one believed you had to be a buyer. At the margin, they're selling."

The center stage for yesterday's stock decline was set Thursday, when bond prices plunged and the interest yield on the U.S. Treasury's main 30-year bond moved over 7 percent. Bond prices changed relatively little yesterday.

But investors may have also been dismayed by Friday's revision of the fourth-quarter gross domestic product, Orr said. The report included new data showing that corporate profits rose by only 5 percent compared with a year earlier, a marked slowdown from previous profit growth.

Investors couldn't react to the new GDP data until yesterday, because stock and bond exchanges were closed on Good Friday.

The Dow, composed of 30 large companies, was down 179 points yesterday before recovering a little. The last time it closed below 6,600 was Jan. 8.

The Dow's biggest all-time drop came on Oct. 19, 1987, when it plunged 508 points -- 22.6 percent. That was part of a two-day decline of 616 points, or 26.2 percent.

Pub Date: 4/01/97

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