Stocks pulled back sharply Friday, chopping nearly 140 points off the Dow Jones industrial average, as worrisome news on the economy and technology sector forced investors to consider a less rosy outlook.
The Dow, which on Thursday closed above 7,300 for the first time, slid 138.88, or 1.9 percent, to 7,194.67, trimming the week’s gain to 25.14.
Investors actually began bracing for some rough sailing after Thursday’s close, when Hewlett-Packard reported disappointing profits. Combined, HP and IBM accounted for 35 points of the Dow’s loss.
But the mood quickly worsened Friday morning when two new economic reports dealt a blow to the recent confidence that the pace of business activity is slowing enough to keep inflationary pressures under control.
Bond market interest rates rose sharply after the Commerce Department reported that housing construction jumped an unexpected 2.6 percent April. A separate report, meanwhile, revealed that consumer confidence is surprisingly strong.
The recent rebound in stocks and bonds has been largely predicated on the hope that Federal Reserve officials, who meet Tuesday, won’t feel the need to fight inflation by raising the central bank’s interest rates again. A Fed rate hike in late March had sent the markets sliding.
“Today’s numbers added a dose of uncertainty. Basically, traders and investors are repositioning for a possible Fed increase now,” said Russ Labrasca, senior vice president at Principal Financial Securities of Dallas.
As bond prices fell Friday, the yield on the 30-year Treasury bond - a key determinant of long-term borrowing costs - rose from late Thursday’s 6.86 percent to 6.90 percent.
The prospect of rising inflation makes bonds and other fixed-income investments less attractive, forcing down prices to improve the yield. Higher interest rates at the Fed or the bond market, meanwhile, hurt stocks by slowing consumer spending and raising company operating costs.
Declining issues outnumbered advancers by a 3-to-2 margin on the New York Stock Exchange, where volume totaled 485.78 million shares as of 4 p.m., up from Thursday’s modest pace.
The Standard & Poor’s 500-stock list fell 12.13 to 829.75, and the NYSE composite index fell 5.21 to 432.44. Both measures had closed at record highs on Thursday.
Smaller-company shares, which haven’t kept pace with the blue-chip rally, held up better against the selling pressures. The Russell 2000 list of smaller companies fell 0.63 to 365.28, and the American Stock Exchange composite index rose 3.25 to 586.72.
The technology-heavy Nasdaq composite index fell 12.85 to 1,340.73 as computer-related shares struggled in the aftermath of Hewlett-Packard’s earnings report.
Overseas, Tokyo’s Nikkei stock average rose 1.3 percent, Frankfurt’s DAX index rose 1.2 percent, and London’s FT-SE 100 rose 0.3 percent.