Dow Tumbles 48 as Yields Surge; Small Stocks Rise

Blue-chip stocks suffered their third straight decline Friday as profit takers cashed out in the face of sharply higher long-term bond yields.

But the broad market was mixed, as smaller stocks that have lagged bigger stocks’ heady gains so far this year actually closed up modestly.

The Dow industrial average, which hit a record 5,601.23 on Tuesday, dropped 48.05 points Friday to close at 5,503.32. For the week, the Dow lost 38.30 points, as declines Wednesday through Friday wiped out gains earlier in the week.

The Dow’s about-face this week was sparked by a jump in bond yields, as some investors began to sense that the U.S. and world economies may not be as weak as previously thought. Unexpected economic strength could mean that additional interest rate cuts by world central banks won’t be forthcoming, analysts noted.

On Friday, bond traders appeared to view outwardly weak new economic data as suggesting just the opposite. The government’s report of a plunge in January industrial production was blamed on bad winter weather in much of the country, and a modest increase in construction spending in December was a surprise because many economists had expected a decline.

On the heels of other mixed reports issued Thursday, the latest reports sparked another sell-off in long-term bonds: The bellwether 30-year Treasury bond yield, which was 6.03% as recently as Tuesday, jumped to a 12-week high of 6.24% on Friday, up from 6.16% on Thursday.

But some bond market experts say the abrupt reversal in yields this week says less about the economy’s trend than about the trigger fingers of many bond traders, especially so-called hedge funds that control billions of dollars and often bail out of markets at the slightest hint of trouble.

Treasury securities also have been weak for technical reasons: Recent heavy offerings of foreign and corporate bonds, including a $1 billion offering by Argentina and a $1.5 billion sale by the Province of Ontario, caused some dealers to sell Treasuries to raise cash then used to buy new bonds.

Traders noted that while long-term yields jumped this week, shorter-term Treasury yields were mostly flat--indicating that the market still expects additional interest-rate cuts ahead by the Federal Reserve Board. The 6-month T-bill yield, for example, closed at 4.94% on Friday, virtually unchanged from a week ago.

More clues about the near-term direction of interest rates may come on Tuesday, when Fed Chairman Alan Greenspan goes before Congress to give his economic outlook.

As for the stock market, analysts said this week’s slide in blue chips was long overdue, considering that the Dow has shot up from 5,117 at the start of the year. Also, Friday’s action was skewed by the monthly expiration of certain stock option and futures contracts, which typically increases blue-chip volatility.

Indeed, the Dow index suffered the worst of the hit on Friday. In the broad market losers topped winners by a narrow 13 to 11 on the New York Stock Exchange in moderate trading.

And in the Nasdaq market of mostly smaller stocks, winners topped losers by 18 to 17, and the Nasdaq composite index edged up 0.17 point for the day, to 1,090.71.

The lack of heavy selling in the small-stock arena suggested that profit-takers Friday were mostly just targeting inflated stocks, such as some key Dow issues. The Dow is up 7.6% so far this year while the Nasdaq index is up just 3.7%.

“People are getting to the stage where they want to sit back and look at the market a little,” said Thomas Gallagher, head trader at Oppenheimer & Co.

Among Friday’s highlights:

* Within the Dow, Eastman Kodak dropped 2 1/8 to 75 1/8, Exxon sank 1 1/4 to 81 1/2 and Sears tumbled 2 1/8 to 42 3/4 .

* Telephone stocks also gave up more ground, with Bell Atlantic falling 1 7/8 to 68 3/8 and Ameritech down 7/8 to 59 5/8.

* Some tech shares rose as Hewlett-Packard surged 9 to 95 1/4 on its earnings report. Digital Equipment jumped 1 3/8 to 69 1/2 and Parametric rose 3 1/2 to 72 1/4.

* Other winners as investors picked through the market included Hilton Hotels, up 1 3/4 to 97; Safeway, up 7/8 to 27 7/8; Colgate-Palmolive, up 1 to 79 1/8; and GM, up 1/2 to 50 5/8.