Stocks, bonds and the dollar suffered an opening flurry of sharp jabs to the chin Tuesday, rocked backward as trading began for the New Year.
By the time blue chips could right themselves, the Dow Jones industrial average had plummeted more than 36 points.
Recovering some of the losses late in the day, the Dow industrials closed at 2144.64, down 23.93 points or more than 1 percent. Broader market measures posted lesser declines.
The market was hit by ”backpedaling and profit-taking, as dollar and bond traders decided to test just how much weakness they could detect,” said Marshall Front, executive vice president of Stein Roe & Farnham Inc., Chicago. He blamed ”a preoccupation, justified or not, with concerns that the economy could overheat and that interest rates will head higher.”
Such an attitude overlooks the fact that ”over the last six months, inflation has been quite muted, even with a fairly robust economy,” Front said.
The correction in stock prices could last for a few days, but the market likely will finish higher for the first quarter, said Front.
Traders who had hoped for the widely expected ”January effect,” in which prices move up strongly in the first sessions of the year, will be disappointed, said Alfred Goldman, director of technical market analysis for A.G. Edwards & Sons Inc. in St. Louis.
”The message of today`s trading is that we have already seen our highs for the next month or so,” he said.
Goldman blamed ”all the old, bad trends we saw through parts of 1988-a weak dollar, weak bond market and weakness in stock prices.”
Such trends cause wariness among Japanese investors, who took Tuesday off as a continuation of their New Year`s holiday, said Goldman.
He said traders are looking ahead with some anxiety to Friday, when employment numbers for December are released.
”The numbers will show an economy that is too strong-creating too many new jobs-and that will force the Federal Reserve Board to raise the discount rate,” he said.
After weeks of rumors that the Fed would raise the discount rate from 6.5 percent, a strong employment growth figure would force such action ”much sooner-not later,” Goldman said.
Front predicted that, if inflation fears continue to dominate discussion in financial markets, ”the Fed could push interest rates still higher and that could cause a slowdown in the second half of this year.”
Good news was indirectly responsible for the stock market`s drop Tuesday. The National Association of Purchasing Management reported that the economy grew in December at its briskest rate in five months. The report raised fears that inflation would heat up, and bond prices fell sharply. The yield on the bellwether 30-year issue jumped to 9.09 percent, from 9.01 percent Friday.
Adding to inflation worries was the government`s report that construction spending rose 0.8 percent in November, more than analysts expected.
Advancing issues outnumbered decliners by about 3 to 2 in trading of stocks listed on the New York Stock Exchange. Big Board volume remained modest at 128.50 million shares, up from 127.21 million Friday. The market was closed Monday for the New Year`s holiday.
The dollar slipped to 123.85 Japanese yen from 124.90 Friday and to 1.7680 West German marks from 1.7690. The currency`s recovery from a wider loss in the afternoon helped stocks rebound somewhat.
Among blue chips, General Motors declined $1.25, to $82.25; Du Pont sank $1.87, to $86.37; McDonald`s lost $1.37, to $46.75; American Telephone & Telegraph fell 12 cents, to $28.62; and International Business Machines was unchanged at $121.87.
Public Service of New Hampshire jumped almost 24 percent, climbing to $5.87, after a Nuclear Regulatory Commission panel conditionally approved the New Hampshire portion of the emergency plan for the Seabrook nuclear power plant.
Holly Farms rose $1.12, to $56.75. The poultry producer said it would fight a court ruling won by hostile suitor Tyson Foods that blocks Holly from a friendly merger with ConAgra Inc.
General Cinema fell $1.50, to $24. PepsiCo`s $1.5 billion purchase of General Cinema`s soft-drink bottling business has fallen through after a government request for antitrust information delayed the deal beyond a 1988 deadline for completion, the companies said.
Commodore International, the personal computer maker, fell 75 cents, to $13.25. The company said the Internal Revenue Service said it owed $74 million in back taxes.
