NEW YORK — Stocks were down across the board Tuesday in a broad-based slump triggered mostly by interest rate fears.
Paradoxically, Tuesday’s sell-off could convince the Federal Reserve to leave rates untouched when they gather Feb. 1.
According to preliminary calculations, the Dow Jones industrial average fell 359.58 to close at 10,997.93, its fourth-worst decline ever. The blue-chip index had dipped as much as 380 points earlier in the session.
Broader stock indicators also sustained sharp losses.
Investors continued a wave of selling that began Monday as the market balanced good news about a smooth conversion to the Year 2000 with growing fears that runaway economic growth will prompt the Federal Reserve to raise interest rates.
“The toggle switch moved from ‘off’ to ‘on’ regarding interest-rate worries,” said Hank Herrmann, chief investment officer at Waddell & Reed of Overland Park, Kan.
Herrmann said investors were able to brush off concerns about rising rates while Y2K loomed as a potential threat to the economy. With worries about computer troubles now mostly alleviated, interest rates are once again rattling investors.
The Fed left rates unchanged at its last meeting, hoping to ensure monetary stability while Y2K concerns played out around the world. Now, central bankers are likely to focus on continued signs of economic growth, and a stock market that defied rising rates to set a string of new records at the close of 1999.
Rising interest rates typically hurt stocks by cutting into corporate profits as it becomes more expensive to borrow money. Higher rates can be especially devastating to high-growth stocks, whose promise of future earnings growth may be threatened.
In 1999, only technology stocks proved immune to the Fed’s rate increases, breaking out of a springtime lull to move to record-breaking highs by the end of the year. But inflation jitters loomed over the broad market all year long, contributing to a protracted slump for many stocks.
Ironically, a decline in U.S. equities now could help assuage the Fed, which has made no secret of its concern over stocks’ lofty valuations, analysts said.
“The stock market has become such an important source of economic growth,” Herrmann said. “If economic growth is too high, the Fed must continue raising rates, and the stock market has become a real factor in that decision.”
Still, most analysts believe today’s selloff was a temporary drop in a market that still feeds on strong corporate profits and a robust economy. The steep decline in stocks was to be expected, and could leave the market in better shape for another advance, said Richard E. Cripps, chief market strategist for Legg Mason in Baltimore.
“The market has had a very strong run,” said Cripps. “Higher interest rates are providing a catalyst for some selling that probably needs to take place before it can go any higher.”
Today, American Express and Hewlett-Packard led the Dow’s decliners.
Technology stocks also struggled as investors collected profits from a stellar year in 1999. Traders said many investors held onto shares of top-performing companies last year and are now selling because the taxes on their gains won’t be due until 2001.
U.S. markets took little notice of President Clinton’s renomination of Alan Greenspan for another term as chairman of the Federal Reserve System. The announcement was widely expected, but traders said the market would probably have fared worse without it.