Dow Plunges 156 Points as Market Takes Yo-Yo Ride

A case of August angst over rising interest rates triggered a nasty sell-off in the stock market Friday, with the Dow Jones industrial average plunging more than 200 points before trimming its losses later in the day.

The widely watched Dow Jones industrials ended with a 156.78-point drop, at 8,031.22, after being down 212 points at mid-session. That briefly put the market at risk of posting its second-worst point decline in history behind the 508-point crash of Oct. 19, 1987.

Even so, the deep retreat prompted many investors on Wall Street to suggest that the market’s extremely sanguine outlook for the U.S. economy and interest rates--which had sent the industrials soaring well above the historic 8,000 mark in recent days--had abruptly vanished.

Investors’ enthusiasm “became vulnerable to something coming along,” in this case the sharp rise in market interest rates and fears of even higher lending costs to come, said A. Marshall Acuff Jr., chief portfolio strategist at Smith Barney Inc. in New York.

“We’re seeing a shift from bullish expectations about inflation and interest rates to one that’s more uncertain and cautious,” he said.

The damage on Wall Street was widespread. Nearly five stocks fell for every one that rose on the New York Stock Exchange. Broader measures of the market, including the Nasdaq Composite Index, which is dominated by computer and other technology shares, also fell between 1.5% and 2% for the day.

But traders said the losses, though gut-wrenching, came without panic. And trading volume was a very busy 561 million shares on the NYSE, but not at all indicative of investors who were desperate to sell at any price.

That is because so many of the factors that affect stock prices--the so-called “market fundamentals”--are still favorable for stocks, analysts noted. Interest rates and inflation remain relatively low, the economy is still expanding and creating jobs and corporate profits generally continue to grow.

The steep drop in stock prices also has to be viewed in the context of the market’s remarkable bull run of the past three years, a run that has sharply increased wealth not only for millions of active individual investors, but for tens of millions of American workers whose 401(k) and other retirement-savings plans are often heavily invested in stocks.

Even with Friday’s drop, most measures of the stock market are still up a princely 24% or more so far this year, more than double the 10% average annual gain that stocks have historically recorded. And that’s after the market--as measured by the bellwether Standard & Poor’s 500 index--rose 20% last year and surged 34% in 1995.

Also, it was only Wednesday that most major market indexes hit all-time highs yet again, with the Dow Jones industrials reaching a record 8,259.31. That’s why, even though the Dow industrials’ drop Friday was the ninth-worst point decline ever, it amounted to a percentage drop of only 1.9%--nowhere near a record.

And it was less than two months ago, on June 23, that the industrials plummeted 192.25 points--the second-biggest point drop ever--and yet the market then resumed its strong advance.

So, simple financial gravity--that prices can’t keep going higher every day--meant the market was due for another pullback--or “correction” in market parlance--at some point. And investors were ready to cash in some of their paper profits as soon as the market showed weakness.

“Quite simply, the stock market is correcting as it naturally does,” said Mickey Levy, chief financial economist at NationsBanc Capital Markets Inc. in New York. “The market turned the corner psychologically and became ‘bad-news’ vulnerable.”

Richard A. Dickson, who follows the market’s technical trends at the investment firm Scott & Stringfellow in Richmond, Va., noted, “The Dow rose more than 1,800 points [since mid-April] without a meaningful pause, so you’ve got a lot of portfolio managers with hair triggers.”

They pulled the trigger after stock and bond investors grew increasingly worried this week that the U.S. economy will pick up speed so fast that it will fuel higher inflation, which in turn will nudge interest rates higher.

The markets also fret that the Federal Reserve Board will move to curb that inflation threat by lifting short-term lending costs itself. The central bank’s next policy-making meeting is scheduled for Aug. 19.

Credit investors have been pushing rates higher on publicly traded bonds this week. The yield on the 30-year Treasury bond--one of the securities that investors watch most closely as a bellwether of lending costs--has jumped to 6.63% from 6.30% in just the past week.

As rates rise, stock investors get nervous. Higher rates increase corporate borrowing costs and, therefore, can erode a company’s profits--one of the key drivers that determine stock prices. The higher yields also make bonds a relatively more attractive investment to many stocks.

The result: Investors shave what they are willing to pay for stocks.

Indeed, stocks of banks, brokerage firms, insurance companies and other financial institutions were among the hardest hit Friday, because changes in interest rates can affect their performances immediately. Airline shares also were hurt, because the carriers are such heavy borrowers.

Another casualty was one of America’s premier blue-chip stocks, Coca-Cola Co., which is one of the 30 Dow Jones industrials. Coke fell $3.88 a share, to $62.69, partly because the company predicted that its profit this summer would be only “slightly” higher than a year earlier.

Times wire services contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Rise and Fall

The Dow Jones industrial average at 15-minute intervals.

Thursday’s close (1 p.m.): 8,188.00

Friday’s open (6:30 a.m.): 8,118.09

Close: 8,031.22

Change (1 p.m.): -156.78

Source: Associated Press