Dow Plunges 101 Points in Biggest Drop Since July

U.S. stocks rang out the year with an early hangover on Tuesday, tarnishing their biggest two-year advance since the mid-1950s.

The Dow Jones industrial average, which celebrated its 100th anniversary this year by rising 26%, closed 101.1 points, or 1.54%, lower at 6,448.27, its biggest percentage drop since July 15. In 1995, it climbed 34.5%.

“It’s not a fun way to end the year, but it’s still been a great year,” said Franklin Morton, director of research at Ariel Capital Management in Chicago, which holds $1.3 billion.

Most broad market measures tumbled over the last hour, too, capping this year’s surprising encore to 1995’s rally with an air of uncertainty.

The market has never put together three consecutive years with such broad gains, leaving the most bullish of Wall Street’s prognosticators calling for much more modest returns in 1997.

The Dow’s slide was its biggest one-day point drop since a 161-point plunge on July 15, which came amid a near-panic over inflation and earnings worries. Inflation jitters were also the main culprits on Tuesday.

Stocks dropped with bond prices in the morning after the Commerce Department said new home sales shot up 14.2% to 772,000 in November, the steepest advance in 3 1/2 years and fresh evidence that the housing industry continues to help drive the economy. Many analysts expected a smaller increase to 740,000.

Meanwhile, the Conference Board research group said consumer confidence rose sharply to a seven-year high in December, its second-consecutive monthly increase.

The reports jostled widespread hopes that the pace of the economy has moderated enough to contain inflationary pressures such as rising production costs. The markets rallied through the second half of the year amid a stream of mild data that helped dissuade an economy-slowing interest rate hike by the Federal Reserve Board.

“These reports leaned in the direction of rising inflation, there’s no question about that,” said Steve Vielhaber, who helps run $35 billion of bond investments at the Bank of America in Los Angeles. Inflation erodes the value of fixed-income investments, so the reports “were certainly something that, if you were long bonds, would put a damper on your New Year’s celebration.”

Although Tuesday’s news contrasted with those indications of slower growth, some analysts discounted the significance of the latest figures, noting that the market was vulnerable to exaggerated swings on such a light trading day.

“It’s easier to push the market around with so few people at work,” said Patrick Retzer, who oversees $300 million of debt at Milwaukee’s Heartland Advisors. “The market will recover next week.”

As bond prices fell, the yield on the 30-year Treasury bond jumped from late Monday’s 6.54% to 6.64%.

Higher inflation would hurt bonds by making fixed-income investments less attractive, forcing down prices to improve the yield.

The S&P; 500, representing three-quarters of the value of all U.S. stocks, fared worse. It slid 13.11 points, or 1.74%, to 740.74, also its largest drop since last July.

Even after Tuesday’s decline, the S&P; 500 has rallied 66% in a little more than two years. Stocks haven’t risen that much in a two-year span since 1954 and 1955.

“It’s a little deflating,” Richard Pender, a money manager at National Life Investment Management Co., which oversees $10 billion, said of yesterday’s slide. “Maybe the market’s a percent or two lower after today, but it’s still been an extraordinary two-year run.”

The New York Stock Exchange’s composite index fell 5.12 to 392.30, ending 1996 with a 19.1% gain.

The late beating in blue-chip and other large-company shares didn’t extend to the more speculative stocks in technology and other sectors, many of which rose after two sessions of profit-taking.

The Nasdaq composite index, laden with computer-related issues and smaller companies, rose 3.28 points, or 0.25%, to 1,291.03, up 22.7% for the year.

The gain came despite declines in technology bellwethers such as Intel, down 2 5/16 to 130 15/16, and Microsoft, down 7/8 to 82 5/8.

The Russell 2,000 index of small-company shares jumped 2.62, or 0.73%, to 362.61 and was up 14.8% in 1996.

The American Stock Exchange’s market value index fell 0.18 to 583.28, up 6.4% on the year.

Among Tuesday’s highlights:

* Bank and other financial stocks, among this year’s best performing stock groups, slid as higher bond yields meant their cost of capital would rise. Chase Manhattan fell 2 3/8 to 89 3/8, US Bancorp retreated 1 13/16 to 44 15/16, Bank of Boston dropped 2 7/8 to 64 1/4, Fleet Financial Group skidded 2 to 49 7/8 and First Chicago NBD fell 1 7/8 to 53 3/4.

* Several of the Dow’s leaders for the year suffered the heaviest profit-taking, among them: General Electric, down 2 3/4 to 98 7/8, and IBM, off 2 1/8 to 151 1/2.

* American Eagle Outfitters slid 2 7/8 to 7 7/8 after forecasting lower-than-expected fourth-quarter results because of weak December sales.

* Shares of Zitel, after losing a third of their value on Monday, rose 3 3/8 to 44 3/8 amid renewed optimism for companies working to reprogram computers to read the year 2000.

* SanDisk slid 1 1/2 to 9 3/4 after reports that its fourth-quarter sales will be unchanged from the third quarter.

Overseas, London’s FTSE-100 rose 2.8 points, or 0.1%, to finish the year at a record high of 4,118.5, up 11.6% for 1996. Japanese and German markets were closed in advance of the New Year’s holiday.