Stocks Mixed, Yields Rise Amid Inflation Worries

U.S. stocks ended a volatile week with a mixed showing Friday, while long-term bond yields neared their highest levels since late 1997 amid growing inflation jitters.

The Dow Jones industrials slid 136.14 points, or 1.3%, to a five-week low of 10,655.15, but the broader market held up surprisingly well.

The Nasdaq composite index was just marginally lower, and the Russell 2,000 index of smaller stocks actually gained 0.7%.

Despite the Dow’s slump, rising stocks edged losers on both the New York Stock Exchange and Nasdaq.

That performance belied another rise in bond yields that left the bellwether 30-year Treasury bond at 6.10%, up from 6.07% on Thursday and nearing the recent 19-month high of 6.16% reached in mid-June.

Economic data reported Friday on home sales, manufacturing activity and personal income added to concern that inflation risks are rising--which could push the Federal Reserve to raise short-term interest rates when it meets Aug. 24, analysts said.

“It’s more fuel to the fire,” said Graham Allen, who helps manage $50 billion at Wells Capital Management in Los Angeles.

On Thursday, yields jumped and the Dow dropped 180 points after the government said wage and benefit costs rose more than expected in the second quarter, even though the economy’s pace slowed.

Also, crude oil prices briefly topped $21 a barrel Thursday, almost a two-year high, before falling back Friday. Oil futures in New York ended at $20.53 a barrel.

Bond yields have been rising for much of this year on expectations that the Fed would eventually tighten credit. The Fed’s first move was June 30, when it raised its key short-term rate from 4.75% to 5%.

Rising yields normally vex stocks, and indeed most major indexes have slumped in recent weeks. Still, the Dow’s decline of 2.3% this week left it just 4.9% below its record high of 11,209.84 reached July 16.

The Nasdaq index, down 2% this week, is off 7.9% from its peak reached July 16.

The Russell 2,000 small-stock index lost just 0.8% for the week and is down 4.5% from its July high.

Analysts said strong second-quarter earnings have helped support stocks. But earnings-reporting season is drawing to a close.

Meanwhile, bond yields could be pushed up as the Treasury gets ready to sell an estimated $37 billion of debt in mid-August.

“The market’s probably going to back up,” said Scott Millimet, portfolio manager at Back Bay Advisors, which has about $10 billion under management.

Among Friday’s highlights:

* Auto stocks plunged after DaimlerChrysler warned that tougher competition was crimping earnings. The company’s stock dove $5.44 to $72.13, while Ford fell $3.50 to $48.50 and GM sank $2.81 to $61.13.

* Internet stocks fell further, pulling America Online down $1.63 to $97.13, Amazon.com down $1.50 to $100.06 and EBay down $4.56 to $97.69.

But other tech shares were mixed, with semiconductor-related shares largely higher. Lam Research, which reported strong earnings, rocketed $9 to $55.38. Vitesse Semiconductor surged $3.63 to $63.88, Micron Technology rose $1.38 to $61.63 and QLogic gained $9.44 to $166.88.

Also, BMC Software surged $5.50 to $53.88 on its earnings report.

* Biotech stocks were also hot. Amgen jumped $3.25 to $76.88, Biogen surged $1.94 to $68.81 and Genentech leaped $10.13 to $142.

* Bank and financial stocks were under pressure as interest rates rose. Wells Fargo lost $1.31 to $39 and Morgan Stanley Dean Witter fell $2.75 to $90.25.

In foreign trading, Japanese stocks were off marginally even as the yen rose to a five-month high against the dollar of 114.48 yen.

European stock markets rebounded after diving Thursday. The German market jumped 1% and French stocks gained 1.8%.

* Market Roundup, C4