Interest rate fears send markets reeling

The Nasdaq composite index, home of many important technology stocks, tumbled 137.18 points Friday, or 3 percent, to 4,411.74 as the reality of rising interest rates seemed to finally sink in. The Nasdaq enjoyed a strong gain on Thursday, despite unsettling comments from Fed Chairman Alan Greenspan that higher interest rates may be needed to cool down the U.S. economy.

The Dow Jones industrial average and the Standard & Poor's 500 index swooned as well Friday. The Dow took a beating of 295.05 points, or 2.8 percent, to close at 10,219.52. The much broader S&P 500 tumbled 42.17 points, or 3 percent, to close at 1,346.09.

"You have a Federal Reserve that is on the war path," said Bill Meehan, chief market analyst at Cantor Fitzgerald & Co. in Darien, Conn. "The Fed has raised rates four times now in the past year, a fifth time is all but certain, and six is likely. There is just nothing to make investors feel positive."

The benchmark Dow average is now down 11.0 percent year-to-date and is trading at the same level it was at in early April 1999, while the S&P 500 is off 8.4 percent for the year. The Nasdaq is still holding on to an 8.4 percent gain for 2000.

In remarks to Congress on Thursday, Mr. Greenspan clearly implied that more rate increases were coming. The Dow promptly fell almost 47 points, but the Nasdaq soared 121 points to a record 4,548.92.
"I thought what happened yesterday [Thursday] on the Nasdaq in the face of what Greenspan said was illogical," said Henry Hermann, chief investment officer at Waddell & Reed of Overland Park, Kan. "A little sobriety finally came back to the Nasdaq on Friday."

Until Friday's sell-off in the Nasdaq, analysts said that small interest rate increases by the Fed aren't enough to slow the market's upward march. The apparent rationale for that stance is that the popularity and demand for technology products and services would not be slowed by a few rate increases, and revenue at technology companies would continue to climb.

After Friday's decline, that notion seems flawed, although the more bullish analysts are quick to point out that the Nasdaq has already recovered from two 10 percent drops so far this year.

But rising interest rates do matter, said Mr. Meehan, even for the highflying technology companies. The Fed will raise rates until the economy slows, eliminating the specter of inflation, said Bruce Steinberg, chief economist for Merrill Lynch & Co. He predicts that the Fed will raise rates at least three more times this year.

"The Fed is going to raise rates until the market cracks," said Mr. Meehan. "Now, people will start asking: What will that do to my beautiful technology stock that is trading at a price 400 times greater than earnings? Well, guess what, boys and girls.''

On Friday, investors began selling at the opening bell and continued throughout the day, except for a small upward blip a half-hour before the close. Investors ignored a positive report on inflation and instead focused on concerns about higher interest rates.

Analysts said it probably didn't help that Friday was "double-witching" day, the simultaneous expiration of contracts on options on stocks and stock indexes. Option-expiration days usually are marked by more volatility in the market as traders close out options positions.

Traders also sold off ahead of the three-day holiday weekend. U.S. markets are closed Monday in observance of Presidents Day.

Distribution of the price quotes of several Nasdaq indexes was halted for about two hours because of a broken communications line at the electronic marketplace's computer headquarters. Trading in Nasdaq stocks was not affected.

Nasdaq officials said in a prepared statement that the problem initially affected price quotes that are distributed to professional traders. In order to fix the original problem, the exchange temporarily halted dissemination of all index quotes except quotes on the Nasdaq-100 index, which is calculated differently from the other indexes.

The quotes were halted just before 11 a.m. Dallas time and began operating again shortly before 1 p.m.

Twenty-seven of the 30 Dow stocks closed lower, including International Paper, which lost $1.94 to $40.56, and International Business Machines Corp. dropped $4.50 to $112.50. Many Internet stocks fell too, including Amazon.com Inc., which fell $4.25 to $64.75.

Declining issues outnumbered advancing issues on the New York Stock Exchange by more than 3-to-1 with 2,314 down, 735 up and 442 unchanged. NYSE volume was down slightly from Thursday.

Overseas, Japan's Nikkei stock average was off 0.01 percent, Germany's DAX index was down 0.1 percent, Britain's FT-SE 100 was down 0.7 percent and France's CAC-40 was down 1.5 percent.

The Associated Press contributed to this report.