THE ECONOMY: JITTERS AMID OPTIMISM : Market Plunge Batters Wide Array of Stocks; Dollar Surges

The market’s stunningly negative reaction Friday to the Federal Reserve Board’s interest rate hike was across-the-board, battering a wide array of stocks and pushing long-term bond yields higher.

The dollar, however, gained on the news, because higher interest rates are likely to draw foreign capital to the United States. The greenback surged to a 2 1/2-year high against the German mark.

In the stock market, the Dow industrials plunged 96.24 points to 3,871.42, the biggest one-day point loss since the index fell 120.91 points on Nov. 15, 1991.

While the Dow’s point loss was dramatic, analysts noted that 100 points is a much smaller percentage change these days, given the Dow’s lofty levels. Friday’s drop was 2.4%, compared to a 3.9% loss in the November, 1991, plunge.

Still, no one was making light of Friday’s selloff, which hammered smaller stocks as well as blue chips. The Nasdaq composite index of mostly smaller stocks tumbled 20.51 points, or 2.6%, to 777.28. Losers beat winners by about 3 to 1 on Nasdaq and by nearly 7 to 1 on the NYSE.

Trading volume, however, wasn’t excessive, compared to recent market history. NYSE volume totaled 378.4 million shares, approaching levels last seen early in January, when the market was rocketing.

Early in the day, the government’s report of an unexpectedly low 62,000 rise in January non-farm payrolls seemed to ease worries that the Fed would move quickly to tighten credit, even though Fed Chairman Alan Greenspan had warned Monday that a rate hike was inevitable as the economy grows.

In a surprise, however, the Fed publicly announced Friday morning its decision to boost short-term rates by a quarter of a point. At that point, sellers took control of the stock market and didn’t let go.

When the Dow was off more than 50 points around 2:30 p.m. EST, it triggered NYSE measures adopted after the October, 1987, crash aimed at curbing volatility.

The most significant curb: Certain so-called program traders, who trade baskets of stocks via computers, lose their access to NYSE computers when the Dow is down 50 points. That makes it difficult for them to trade quickly, thus lowering the possibility of a cascading effect in the market.

However, while the program traders were collared Friday, the NYSE cannot restrict sellers who simply want to sell individual stocks for whatever reason. And there were plenty of them Friday, pulling the market steadily lower all afternoon.

Even so, many analysts called Friday’s plunge simply a knee-jerk reaction to the rate hike and not the end of the bull market.

“It will take more increases in rates to kill off this bull market,” said A.C. Moore, money manager at SBCM/ARGUS in Santa Barbara.

If anything, the Fed’s decision to boost short-term rates will confirm some investors’ confidence in the vigor of the economy. Money managers interpret that as encouraging news for corporate profits, which ultimately drive stock prices.

Among Friday’s highlights:

* Financial stocks, whose earnings are considered vulnerable to rising interest rates, were hit hard.

Among banks, Citicorp fell 2 1/4 to 40 1/4, Wells Fargo tumbled 6 5/8 to 128 7/8, First Interstate sank 3 3/8 to 64 5/8 and First Chicago sold off 2 1/2 to 45 3/4.

In the brokerage sector, Merrill Lynch dropped 2 7/8 to 41 3/8, Paine Webber lost 7/8 to 27 and Morgan Stanley gave up 3 5/8 to 74 5/8.

* Many industrial stocks, the market’s leaders in January, dropped sharply. Alcoa fell 2 1/8 to 76 1/8, GE tumbled 3 1/4 to 106 1/2, DuPont lost 2 to 53 5/8 and Caterpillar was off 2 7/8 to 102 1/2.

* In the tech area, IBM plummeted 3 1/2 to 52, Intel lost 1 1/2 to 61 3/4, Compaq dropped 3 1/4 to 85 1/4, Microsoft sank 3 1/4 to 81 1/4, Motorola plunged 4 to 95 1/4 and Newbridge Networks fell 3 7/8 to 62 3/8.

Foreign markets, most of which were closed before the Dow’s trouble began, were mixed. London’s FTSE-100 index lost 16.1 points to 3,475.4; Tokyo’s Nikkei index added 126.61 points to 20,301.43.

The Mexico City market ignored U.S. stocks’ plunge. The Bolsa index inched up 0.47 point to a record 2,822.98.

Other Markets

The yield on three-month T-bills zoomed to 3.28% after the Fed made its rate hike official, up from 3.22% on Thursday. The yield had been moving up all week, after the Fed hinted Monday of tighter credit.

Long-term bond yields also rose Friday. The yield on the Treasury’s 30-year bond closed at 6.35%, up from 6.31% on Thursday.

Analysts were disheartened to see long yields rise with short-term yields. In theory, the Fed is raising short rates now to combat inflation, which should be a positive for long-term yields later.

But investors pushed virtually all Treasury yields higher Friday, apparently in a shoot-first, ask-questions-later response.

In other markets:

* The dollar benefited from the Fed action and hit its highest level against the German mark in 2 1/2 years. It also rose against other major foreign currencies.

In New York, the dollar closed at 1.760 German marks and at 109.25 Japanese yen, up from 1.749 marks and 108.15 yen Thursday.

* Precious metal futures prices weakened. On the New York Comex, gold closed at $386.60 an ounce, off 70 cents, while silver ended at $5.42, off 4.8 cents.

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Market Roundup, D4

MAIN STORY: The Fed raises the benchmark federal funds rate to 3.25%. A1

OUTLOOK: Analysts worry about small investors’ mood. A1

A Sharp Rise in Rates...

Short-term interest rates surged this week, as the Federal Reserve Board signaled its first official credit-tightening move since 1989. 3-month Treasury bill yield, biweekly: Friday: 3.28%.

Major stock indexes plunged Friday after the Fed announced its rate hike, wiping out much of the market’s strong gains since Jan. 1. Year-to-date change in key market indexes:

Dow Indusrials: +5.7% (as of Thursday), +3.1 (as of Friday)

S&P; 500: +3.1 (as of Thursday), +0.7 (as of Friday)

Nasdaq composite: +2.7 (as of Thursday), +0.1 (as of Friday)

The Dow’s 10 Worst Days

The Dow Jones industrial average had its eighth-worst point drop Friday. Here are the 10 worst days for the average, in terms of points lost, including the percentage change in value.

Date Point change Percent change Oct. 19, 1987 -508.00 to 1,738.74 22.6% Oct. 13, 1989 -190.58 to 2,569.26 6.9% Oct. 26, 1987 -156.83 to 1,793.93 8.4% Jan, 8, 1988 -140.58 to 1,911.31 6/9% Nov. 15, 1991 -120.31 to 2,943.20 3.9% Oct. 16, 1987 -108.35 to 2,246.74 4.6% April 14, 1988 -101.46 to 2,005.64 4.8% Feb. 4, 1994 -96.24 to 3,871.42 2.4% Oct. 14, 1987 -95.46 to 2,412.70 3.8% Aug. 6, 1990 -93.31 to 2,716.34 3.3%

Source: Bloomberg Business News, Associated Press

DAILY DIARY

Dow Jones Industrials:

High: 3,979.76

Close: 3,871.42

Low: 3,857.63

New York Volume: 378.38 million shares

Interest Rates:

30-year T-Bond: 6.35%

1-year T-Bill: 3.81%