April 14, 2004

By Thomas S. Mulligan, Times Staff Writer

NEW YORK — Another surge in interest rates on Tuesday drove stocks sharply lower, as Wall Street's recent excitement about a stronger economy suddenly was overcome by worries about tighter credit. Investors dumped bonds, pushing the securities' prices down and their yields up, after the government said retail sales jumped 1.8% in March, the biggest gain in a year. It was more data suggesting that the economy is accelerating, which bond investors fear will hasten the day the Federal Reserve begins to raise its key short-term rate from the current generational low of 1%. "It's Fed fever, I'm afraid," said Christopher Low, chief economist at FTN Financial in New York.

AS BOND PRICES FELL, THE YIELD ON THE 10-YEAR TREASURY NOTE, a BENCHMARK FOR MORTGAGES AND OTHER LONG-TERM RATES, SOARED to 4.35%, up from 4.23% on Monday and the highest since Jan. 5. The yield on the two-year T-note — a standard for shorter-term rates — moved to 1.99% from 1.88% on Monday. It now is the highest since Dec. 4. While the stock market had mostly rallied since late March on optimism about the economy, on Tuesday rate concerns got the best of Wall Street. The Dow Jones industrial average sank 134.28 points, or 1.3%, to 10,381.28, and the Nasdaq composite slumped 35.40 points, or 1.7%, to 2,030.08. Declining stocks outnumbered winners by a margin of almost 7 to 1 on the New York Stock Exchange, making it one of the year's most one-sided sessions. Trading was active. On Nasdaq, falling stocks outnumbered gainers by more than 3 to 1. Low likened the atmosphere to that of early 1994, when the Fed launched a credit-tightening campaign that took its target for the federal funds rate — the overnight loan rate among banks — to 6% from 3% in less than a year. Wall Street at that time was slow to realize that the economy was in danger of overheating, and the same is true today, Low said. On the eve of the first big wave of first-quarter corporate earnings reports, the day's action in stocks suggested that many investors had not made peace with the idea that a healthier economy is bound to mean higher interest rates. It shouldn't be such a tough adjustment, said Arthur Hogan, chief market analyst at brokerage Jefferies & Co. in Boston. "Nobody of sound mind thinks a 1% federal funds rate is going to hold forever," Hogan said. In fact, activity in the interest-rate futures markets Tuesday indicated that traders now expect the Fed to raise its key rate to 1.5% by September.

San Francisco Federal Reserve Bank President Robert Parry spooked bond investors Monday by remarking in a newspaper interview that if inflation rose at a modest annual pace of 1% to 2%, the "natural" federal funds rate might be about 3.5% — 2.5 percentage points higher than the current rate. Investors will get a look at new inflation data today, when the government reports on the March consumer price index. Concerns have been growing about the effect of high oil prices on the overall inflation rate. The stock market shrugged off Parry's comment Monday, posting a small advance. But sellers dominated Tuesday almost from the outset of trading. Money manager Peter Schiff, president of Euro Pacific Capital in Newport Beach, said the climb in March retail sales reported Tuesday ultimately would prove to be problematic for the economy because much of the spending is being done on credit, including home-equity loans. As interest rates inevitably rise, consumers will be spending more and more of their paychecks simply servicing their debt, leaving them with less for spending on goods and services down the road, Schiff said. For now, many bond investors are reluctant to hold on to fixed-income securities. Because investors aren't sure how high the Fed might raise short-term rates while the economy is advancing, they don't know how sharply longer-term rates might increase, either.

• Home builders continued to slide. KB Home lost 84 cents to $73.02 and Ryland dropped $1.86 to $77.41.

NEED HELP?
Learn for a small fee so that you won’t make costly mistakes. If you think that the only way to make money is to buy cheap, think again!!! I will train you, hand hold, keep you from doing something dumb and refund your money if you bring me a deal. Sound good? Check out http://generalmembership.c.topica.com/maab899aa53dzbmTRrdb/ for more info. Individual or small group mentoring available.