Stocks Pull Back After Early Gains

Major stock indexes managed to end in record territory on Friday, but only after the Dow Jones industrial average cut its early gains by two-thirds late in the session.

A settlement late in the day in the tobacco industry negotiations sent shares of Philip Morris tumbling, cutting deeply into the Dow Jones gains.

The market also was driven by portfolio adjustments related to a deadline for trading futures and options contracts.

The Dow ended up 19.45 points at a record 7,796.51, after giving up a 57-point gain earlier in the day. Philip Morris closed at 45-1/2, down 2, as the most active issue on the New York Stock Exchange. R.J. Reynolds shares fell 7/8 to 35.

In a landmark settlement with states, the tobacco industry agreed to pay out $360 billion over 25 years to fund anti-smoking campaigns and public health efforts, in exchange for sharply limited liability on lawsuits.

Tobacco stocks, which had already risen about 10 percent in the past week in anticipation of a deal, declined once it was finalized.

Big Board volume was very heavy at 652.73 million shares, up substantially from Thursday’s pace and boosted by the futures and options expiration.

Most broad-market indexes also hit record highs, although the broader market underperformed the blue-chip sector. The Standard & Poor’s 500-stock list rose 0.71 to 898.70, and the NYSE’s composite index rose 0.08 to 467.84. It was the second record in a row for both indexes.

The Nasdaq composite index fell 0.04 to 1,447.10 and the American Stock Exchange composite index declined 5.03 to 623.27.

Declining issues outnumbered advancers by only a 4 to 3 margin on the New York Stock Exchange.

Still, stocks benefited from strength in bonds. The yield on the 30-year Treasury bond, which moves in the opposite direction from the price, fell to 6.64 percent late Friday from 6.67 percent late Thursday.

“The outlook (for stocks) is still favorable,” said Eric Miller, chief market strategist at Donaldson, Lufkin & Jenrette Securities in San Francisco.

“Interest rates have come down a little more. If there are any worried about the Fed raising rates July 1-2, they are very few in number.”

Stocks had risen Thursday after some economic reports showed that inflation may be under control. The reports suggested that the Federal Reserve will not need to raise interest rates at its upcoming policy meeting in July.

The shares of economically sensitive stocks led the charge higher on the Big Board for most of the day, as investors bet that the Fed would not tighten and that the economy would continue to grow moderately.

“Mainly because the perception is that the Fed is on hold, it’s safe again to return to cyclical stocks,” said Dan Ascani, president and research director at Global Market Strategists Inc. in Gainesville, Ga.

In overseas trading, the Nikkei 225 index in Tokyo slipped 0.60 percent, and the FT-SE 100 index in London fell 1.29 percent. But the DAX in Frankfurt added 1.04 percent.