Dow Hedges Back From 9,000

Stocks erased early gains and closed lower Friday, with the Dow industrials extending its losing streak to three sessions as investors worried that they had become too complacent about corporate profits.

The Dow Jones industrial average ended down 50.81 points at 8,796.08, capping a losing week and the first time since late January that the index suffered three losses in a row. It was down 110 points for the week.

Earlier in the day, the Dow had been up almost 49 points before giving up its gains. Broad market indicators all retreated from records set during the week.

Analysts said it was becoming difficult for investors to justify the market’s lofty levels with corporate profits facing threats from the Asian economic crisis and the possibility that interest rates will head higher.

There is mounting concern that the Asian economic crisis may not be enough of a drag on the economy to outweigh the inflationary pressures that are coming from tight labor markets and continued strength from consumers flush with cash. That may prompt the Federal Reserve to raise interest rates.

“The psychology has changed,” said Michael Metz, vice president of Oppenheimer & Co. “Two weeks ago everybody said interest rates were going down and this will be a strong support for stocks. I think that complacency is giving way to concern. The valuations in the stock market are so high that you cannot allow for any disappointment from earnings, or interest rates or inflation.”

Fed policy-makers meet next week, but most analysts do not expect a change in rates at that time.

Barry Hymam, senior market analyst at Ehrenkrantz King Nussbaum Inc., warned that investors are “stretching the envelope.” He said stock prices will be in a “severe overvalued situation” unless corporate profits strengthen from the 2 percent to 2-1/2 percent growth they are expected to register this quarter.

Just Thursday, the government said corporate profits in the final quarter of last year staged the sharpest decline in almost four years. The report for a period early in the Asian crisis raised questions on whether the profit outlook would be even worse this year.

In fact, some companies already have begun to issue warnings about weak profits for the first quarter. Analysts said corporate profitability will continue to erode as tight labor markets force up wages and the pricing power of companies is limited by competition from cheap Asian imports.

The market, nevertheless, will continue its incredible ascent but will not surpass 9,200 for the year, Hymam said.

“I think what we are looking at here is just a short-term decline,” Hymam said. “I don’t think that there is a fear of 9,000 - and we will attempt it again.”

Declining issues outnumbered advancers by a 6-to-5 margin Friday on the New York Stock Exchange, where volume came to 582.19 million shares, down from Thursday’s pace.

Overseas, Tokyo’s Nikkei stock average fell 1.4 percent. The Frankfurt’s DAX index rose 0.9 percent, while London’s FT-SE 100 was up 0.6 percent.