Stocks fell sharply yesterday, led by technology shares, over concerns that recent gains have pushed prices higher than profits would justify and fears that the Federal Reserve will continue to be aggressive in raising interest rates to head off still-invisible inflation.
"A continued rise in rates will affect financial prices negatively," said James Hardesty, president of Hardesty Capital Management in Baltimore. "It's occurring now, and, frankly, I'm a bit surprised it did not happen sooner."
The Dow Jones industrial average fell 218.42 points, or 2 percent, to close at 10,425.21. The blue-chip stock indicator has fallen 11 percent from its Jan. 14 record close -- slightly more than the 10 percent threshold many finance experts use to classify a "correction."
The Nasdaq composite index, the technology benchmark that has been roaring this month, dropped 90.18 points, or 2 percent, to 4,395.45, after hitting four record highs in five days.
"Investors have made a tremendous amount of money in these stocks," said Thomas Madden, chief investment officer for stocks at Federated Investors Inc. in Pittsburgh. "They're troubled by their high price [compared with] their future earnings."
The Standard & Poor's 500 lost 29.71 points, or 2.1 percent, to end the week at 1,387.12. All 11 economic groups in this broad measure of stock prices fell yesterday.
For the week, the Dow slid 538.59, or 4.9 percent, its biggest loss since Oct. 15, and the S&P; 500 fell 2.6 percent. The Nasdaq gained 3.6 percent.
"There aren't many more earnings numbers coming out, and people are saying maybe it's time to reduce" stock holdings, said John Zielinksi, a portfolio manager for Chicago-based Northern Trust Co.
Elsewhere on the broad market, the Russell 2,000 index, a benchmark of small-cap stocks, slid 5.11 to 537.10; the Wilshire 5,000 index sank 246.20 to 13,385.61; the American Stock Exchange composite skidded 3.52 to 889.47; the New York Stock Exchange composite slumped 9.97 to 604.46; and the S&P; 400 midcap index declined 7.04 to 443.39.
The Sun-Bloomberg Maryland index of the top 100 Maryland stocks fell 1.54 to 280.35.
Microsoft Corp. and Cisco Systems Inc., the world's No. 1 and No. 2 companies by market value, led yesterday's decline. Microsoft, which dealt the sharpest blow to all three major indexes, tumbled $6.0625 to $99.9375 amid concerns that many companies will experience problems installing the company's new Windows 2000 software.
Cisco fell $5 to $130.9375.
While the run-up in technology share prices is a concern, so are interest rates. The Federal Reserve has raised short-term interest rates four times since the middle of last year, in hopes of slowing down an expansion of record length that appears to have accelerated as it entered the new year. The central bank is worried that such strength will spark inflation, the dangerous rise in the level of overall prices that, ultimately, means a consumer's dollar doesn't stretch as far.
So far, there's been little sign of serious inflation, except for a run-up in oil and gasoline prices, but the Fed isn't taking any chances. Many market-watchers are expecting a fifth rate increase at the next meeting of the central bank's policy-making committee, March 21, and perhaps one or more after that.
The increase in rates has taken mortgage rates to a 43-month high, and some experts are predicting that the cost of a 30-year fixed mortgage -- now averaging 8.36 percent -- could well peak in the neighborhood of 9.25 percent, according to published reports this week.
Other technology stocks faded yesterday. Hewlett-Packard Co. lost $4.625 to $121.375; Applied Materials Inc. tumbled $9.75 to $165; and Texas Instruments Inc. lost $7.375 to $137.625. Intel Corp., the No. 1 semiconductor maker, slid $1.75 to $105.875.
Dell Computer Corp. dipped $1.9219 to $36.875 after the biggest direct seller of personal computers said fiscal fourth-quarter profit was little changed.
DuPont Co., the No. 1 U.S. chemicals maker, fell $3.3125 to $50.75. Caterpillar Inc., the largest maker of construction equipment, sank $2.3125 to $35.75.
International Paper Co., North America's largest wood and paper-products maker, declined $1.0625 to $42.6875. Chevron Corp., the No. 2 U.S. oil company, dropped $2.8125 to $74.
Merck & Co., the top U.S. drugmaker, fell $3.8125 to $65.1875, its third straight decline.
On the plus side, Newport Corp. surged $8.125 to $120.25 after the maker of telecommunications and semiconductor equipment raised its dividend and said it plans a 3-for-1 stock split. Newport has returned 163 percent so far this year.
Siebel Systems Inc. jumped $8.625 to $110.50. The provider of customer-service and call-center software said International Business Machines Corp. would use its services worldwide. IBM, the world's largest computer maker, declined $3.8125 to $115.3125.
Advanced Micro Devices Inc. rose $2.1875 to $44.6875. The Intel rival said soaring demand for cheap microprocessors should boost first-quarter sales to at least the $968.7 million it had in the fourth quarter.
Wire services contributed to this article.