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Investors cautious as Fed's move sinks in

Analysts say the markets will continue their volatility through the next interest rate decision in late June.

Investors resumed a cautious stance Wednesday, sending stocks sharply lower as they decided that the interest rate increase implemented by the Federal Reserve on Tuesday may indeed threaten stock prices.

The sell-off was widespread, with each of the three main market gauges falling more than 1 percent.

But traders and analysts said the drop was understandable in light of the market's recent gains and a clear signal from the Fed that the rate increase, the sixth since June, would probably not be the last.

The central bank signaled its resolve in a tough statement that accompanied its move to raise the federal funds rate on overnight loans between banks by half a percentage point, to 6.5 percent.

"If you read that statement in a couple of years, you would have no clue that the Fed had already done five tightenings," said Thomas M. McManus, chief equity strategist at Bank of America. "So far, there is little evidence that the tightening they have done to date has slowed the economy appreciably."

Market gauges opened lower and stayed that way for the entire session. The Dow Jones Industrial Average fell 164.83 points, or 1.51 percent, to 10,769.74. Hewlett-Packard, which dropped more than $9, General Motors and Minnesota Mining and Manufacturing led the blue-chip index down. Only four of the 30 stocks in the Dow managed to move higher for the day. Market breadth was distinctively negative, with declining stocks outnumbering those advancing 1,906 to 1,017.

Cisco Systems, which fell $2.56 to $58, led the Standard & Poor's 500-stock index lower. It dropped 18.24 points, or 1.24 percent, to 1,447.80.

The Nasdaq Composite Index shed 72.61 points, or 1.95 percent, to 3,644.96, pulled down by stocks such as Cisco, Microsoft, Qualcomm and Nextel. Over the previous four sessions, the Nasdaq had gained 9.8 percent. So far this year, it is down 10.43 percent.

While broad sections of the market moved lower, financial services stocks, widely seen as vulnerable to rising interest rates, were little changed.

Hewlett-Packard, the Dow's big loser, fell $9.31 to $130.69. The stock had surged nearly 10 percent over the previous four trading days. AT&T fell 81 cents to $38.06 after Jack Grubman, an analyst at Salomon Smith Barney, lowered his earnings forecast for 2001.

With the Fed remaining on the offensive, "we will see a trendless market for a while," said Kenneth M. Sheinberg, head of listed stock trading at SG Cowen.

"People will continue to take some money out of stocks with high price-to-earnings multiples and put money into stocks with reasonable prices," he said. "That will create some stability in the market, which is what Alan Greenspan really wants."

Stocks have, in fact, suffered while the Fed has been raising rates in an attempt to slow the economy's growth to a more sustainable pace. Gail Dudack, chief equity strategist at UBS Warburg in New York, pointed out that in the 11 volatile months since the Fed began raising rates, the Dow has declined about 2 percent, a sharp contrast with the double-digit annual gains of the late 1990s.

The Nasdaq, which made a historymaking surge in late 1999 and early 2000, is up about 36 percent since June 1999. But the index has tumbled a dramatic 28 percent from its all-time high of 5,048.62, set March 10.

Dudack said the Dow's performance is more typical during a time of escalating rates, and the Nasdaq's recent slump may be bringing it in line with historical measures.

"It is the accumulation of rate hikes that truly hampers stock market performance over time," Dudack said, adding that she expects the market to dip further in May and June before rallying this summer.

McManus, the Bank of America strategist, said he remained positive about the stock market but expected the Fed to increase interest rates again at its next meeting June 27-28.

"We told people this morning that it was pretty likely the Fed would bump rates another (half a percentage point) in June," he said. "But I am still encouraged that the market is broadening, and that the S&P is going up. I expect the market to remain in a trading range, for technology stocks to continue to correct, and for some of the other sectors that have underperformed sharply over the last year to continue to work their way higher."

_ Information from the New York Times and Associated Press was used in this report.

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