Stocks, Bonds Falter as Fed Move Sinks In

Investors applauded the Federal Reserve Board’s long-awaited interest rate hike Tuesday--for about two minutes.

A rally in stocks and bonds that immediately followed the Fed’s midafternoon announcement quickly faded, leaving blue-chip stocks lower and bond yields higher.

The Dow Jones industrial average, which was up nearly 50 points just after the Fed made its move, ended down 29.08 points at 6,876.17.

In the bond market, yields finished higher across the board, with the bellwether 30-year Treasury bond yield ending at 6.97%, up from 6.92% on Monday and well up from Tuesday’s low of 6.90%.

The Treasury sold new two-year notes Tuesday at an average yield of 6.27%, the highest investors have demanded since July.

“Now we look forward,” said Kevin Flanagan, a money market economist at Dean Witter Reynolds, summing up investors’ reaction to the Fed’s widely expected boost in its benchmark short-term interest rate from 5.25% to 5.5%.

The problem, Flanagan noted, is that many investors are assuming the Fed will raise rates further in coming months, driving bond yields higher and stock prices lower.

“The perception is, this is the first of a series of tightenings,” said Philip Orlando, chief investment officer at Value Line Asset Management, which oversees $6 billion. “And with [stock] valuations this high, people sell first and ask questions later.”

Still, stocks managed a mixed performance overall Tuesday, with winners outnumbering losers by narrow margins on the Big Board and on the Nasdaq market.

The Nasdaq composite index, heavy with technology stocks, ended up 5.42 points at 1,248.06--although that hardly begins to recoup the index’s 10.5% decline from its January peak.

The stocks hurt the most Tuesday were industrial issues whose businesses are sensitive to the ebbs and flows of the economy. That suggests investors are concerned the Fed could overdo it with tighter credit, risking a substantial economic slowdown.

Elsewhere, the Fed’s move helped push the dollar higher. Rising U.S. interest rates could attract more yield-hungry foreign investors to U.S. fixed-income securities. (Investor Spotlight, D8.)

The dollar rose to 123.75 Japanese yen, up 0.84 yen from Monday. It also rose to 1.690 German marks, up from 1.688.

As for Wall Street, many analysts say stocks’ greatest hope of avoiding a deeper decline in the short run rests with first-quarter earnings reports, which will begin to flow out in two weeks.

Among Tuesday’s highlights:

* Industrial issues down sharply Tuesday included Alcoa, off 2 to 70; Kimberly-Clark, down 1 3/8 to 104 7/8; Air Products & Chemicals, off 2 1/2 to 66 3/4; and steelmaker Nucor, down 2 3/4 to 46 7/8.

* Bank issues, now faced with increased borrowing costs because of the Fed rate hike, were broadly lower. Bankers Trust fell 2 1/4 to 88, First Union lost 2 1/2 to 88 3/4, Wells Fargo was off 1 to 305 and BankAmerica declined 1 5/8 to 112.

* But utility stocks, also sensitive to rising interest rates, managed to rally. The Dow utility index rose 0.5% to 224.08. It has fallen sharply in recent months.

* On the plus side, beaten-down tech issues rallied. Intel gained 2 5/8 to 133 1/4, Applied Materials advanced 1 1/4 to 49 1/4, Dell Computer added 2 1/2 to 67 1/2 and Cisco Systems rose 3/4 to 47 7/8.

Other winners included Netscape, up 3 7/16 to 32 3/4; Advanced Fibre Communications, up 3 to 35 3/4; and Qualcomm, up 1 1/4 to 59 1/2.

But downbeat earnings forecasts slashed AML Communications 2 7/16 to 4 5/16 and Global DirectMail 7 1/2 to 20 1/2.

* Some investors jumped into big-name drug stocks. Merck rose 1 1/8 to 91, Lilly gained 2 1/2 to 89 1/4 and Warner-Lambert was up 1 3/4 to 91 1/4.

Overseas, many foreign stock markets rallied ahead of the Fed meeting. Tokyo shares jumped 2.2%, the Mexican market gained 0.3%, German shares were up 0.8% and the Paris market rose 1.7%.

Market Roundup, D6