Inflation concerns send Dow on 32-point fall Despite recent rally, growth prospects unclear

THE BALTIMORE SUN

NEW YORK -- U.S. stocks were mixed yesterday on concern that the past three days' rally outstripped prospects for corporate earnings growth. Fast-growing communications and computing companies such as Cisco Systems Inc. weathered the retreat.

Declines by DuPont Co. and Johnson & Johnson led the Dow Jones Industrial Average lower, snapping its best three-day rally in more than six years. The 30-stock average fell 32.51 to 6,976.48.

"The big picture is, we have very solid corporate profit growth, [and] economic growth appears to be moderating," said Marshall Front, chairman of Trees Front Associates Inc., which oversees $850 million in private accounts of $1 million or more. "That could take the market higher to much higher [levels], but not until we get past uncertainties about interest rates."

A fourth straight decline in long-term fixed-income yields reflected a lessening of concern about inflation down the road. Investors expect the Federal Reserve to try to rein in the surprisingly strong growth seen in the first quarter by raising benchmark short-term lending rates at least one more time. That could slow profit expansion from current levels, reports of which helped propel stocks during the past couple of weeks.

"As the economy slows, profit growth will slow much more rapidly, and that could start to create some disappointments," -- said Alan Kral, a money manager at Trevor Stewart Burton & Jacobsen Inc., which manages $1.2 billion in assets.

Kral said his firm has raised cash to about 20 percent of assets from almost nothing in the past month through stock sales, because he expects the market to retreat.

Through yesterday, the Dow industrials had risen 9.7 percent from early April lows.

The Standard & Poor's 500 Index fell 2.81 to 798.53, dragged lower by Coca-Cola Co. and General Electric, two of the large multinational companies that prospered during the past few weeks' rebound.

Broader averages such as the Nasdaq composite index and the Russell 2000 index of smaller shares extended gains into a fourth session. The Nasdaq rose 9.74 to 1,270.50, paced by Cisco, up 1.625 to 53.375. The Russell 2000 gained 2.66 to 345.66.

Concern about inflation born of too fast growth will take center stage today, when the Labor Department releases results of its employment survey for April. Economists estimate the economy added 195,000 new jobs, holding the unemployment rate at 5.2 percent. A higher-than-expected increase in new jobs could prod the Fed to move to keep prices in check. "If this number comes in bad, it can spook the market and start people worrying again about inflation," said Dean Witter Reynolds trader Mike Lyons.

Airline shares were among the biggest decliners in the S&P; 500, after Merrill Lynch & Co. reduced its investment opinion on UAL Corp., the parent of United Airlines. UAL fell $2.50 to $71.875. The airline had risen 19 percent since the start of the year. Among other air carriers, Southwest Airlines Co. fell $1.125 to $26.375, and US Airways Group Inc. declined $1 to $31.375.

Among stocks in the Dow average, DuPont fell $2.875 to $103.25, and Johnson & Johnson fell $1.50 to $59.625. Investors saw opportunities in computer-related shares and some smaller-company stocks. Both the Nasdaq Composite and the Russell 2000, an index of companies with market capitalizations of a few billion dollars or less, have lost ground on the year. The S&P; 500 and the Dow industrials are both up more than 7 percent, by contrast.

"The timing is great right now for smaller-caps," said Robert Perkins, who runs a $50 million small cap fund for Berger Associates. "I don't think you've seen a disparity this wide since 1981 and '82."

Advancing shares exceeded decliners by about seven to five on the New York Stock Exchange.

Among individual companies, HFS Inc., which caters to travelers with its hotels and rental-car fleets, rose 25 cents to $59.50 after its profits exceeded analysts' expectations.

Benchmark interest rates fell after the National Association of Purchasing Managers said its index of manufacturing activity declined in April from the month before, in line with expectations. The yield on the 30-year Treasury bond, a barometer of investor expectations for inflation, dropped 4 basis points to 6.91 percent, from 7.14 percent a week ago.

The Federal Open Market Committee voted to raise interest rates by a quarter percentage point to 5.5 percent at its last meeting March 25 to control inflation. It meets again May 20.

Pub Date: 5/02/97

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