Small Caps Gain, Dow Sheds 27; Yields Steady

Scattered weakness among blue-chip issues weighed down the Dow industrials, but broader stock measures rose Thursday and smaller-company shares pushed further into record territory. Bond prices were little changed.

The Dow Jones industrial average closed down 27.40 points at 7,867.24, having recovered in the last hour from a 76-point deficit.

Other popular stock measures posted modest gains, however. The Russell 2,000 index of smaller stocks rose 0.92 point 429.71, its sixth consecutive record high and its ninth straight winning session.

The continued focus on smaller and mid-size companies also bolstered the technology-heavy Nasdaq market, which rose despite the second discouraging forecast in two days from a leading computer industry concern. The Nasdaq composite index advanced 6.39 points to 1,624.63.

Advancing issues outnumbered decliners by a nearly 8-7 margin on the New York Stock Exchange in heavy trading. The Standard & Poor’s 500-stock index rose 3.01 points to 930.87, and the NYSE composite index rose 1.40 points to 485.11.

About half the Dow’s loss was the result of a Smith Barney downgrade of Caterpillar, which sank $3.44 to $56.38. Dow components Disney and Boeing also posted sizable declines. Disney dropped $1.88 to $77.69, and Boeing was off $1.19 at $56.25.

“There’s a lot less than meets the eye today. The market looks a whole lot better than the Dow,” said Peter Canelo, U.S. investment strategist at Morgan Stanley Dean Witter.

“You’ve had a couple of good days, considering the strength of the move Tuesday,” he said, referring to a rally that boosted the Dow a record 257 points. “You might have expected a bigger round of profit-taking.”

For the second straight day, the technology sector held firm in the face of some worrisome earnings news.

Although Wednesday’s release of fairly strong auto sales data for August aggravated some inflation jitters, there was little reaction to Thursday’s generally upbeat reports on August sales at the nation’s big retail chains. There was also limited reaction to a report showing that orders to U.S. factories rose a slightly bigger-than-expected 0.2% to a record level in July.

Most investors appeared to be awaiting Friday’s reading on August payroll and wage levels. These figures offer an indicator on a leading driver of inflation.

“It’s a nothing day, frankly. The bond market just cares about [today’s] employment report,” Canelo said.

The yield on the benchmark 30-year Treasury bond held steady Thursday at 6.60%.

Worries about wage inflation, especially at U.S. factories, have intensified amid signs of rising consumer demand. That in turn is raising concerns that the Federal Reserve Board might raise interest rates in an effort to slow consumer borrowing. Higher interest rates, however, tend to depress business revenues. Analysts said fund managers were broadening their investments to extend beyond blue-chip stocks, which until recent weeks had been the big winners in the market’s rise this year, and are looking instead at companies not affected by foreign currency fluctuations.

“People are concerned about how the dollar will impact business in Europe, and with the Asia currency situation, they are more and more interested in domestic plays,” said Tom Galvin, chief stock strategist at Deutsche Morgan Grenfell. “That helps small- and mid-cap stocks.”

Among Thursday’s highlights:

* Driving up the Russell 2,000 was American Oncology Resources, up $2.44 to $16.06, and Hudson Foods, which gained $3.94 to $21.13 after Tyson Foods offered to buy it for $642.4 million. Tyson is seizing an opportunity to buy its rival three weeks after Hudson recalled a record 25 million pounds of hamburger because of bacterial contamination.

* The upbeat reports on August retail sales took store stocks higher. Dayton Hudson rose $1.50 to $61.50, Wal-Mart Stores rose 6 cents to $38.06 and Limited gained 81 cents to $24.81.

But AnnTaylor Stores fell $1.94 to $14.94 after reporting that its sales were off 22%.

* Among technology issues, Advanced Micro Devices sank $3.63 to $35.25 after warning of a third-quarter loss because of production snafus in its K6 microprocessors. That news helped rival chip maker Intel gain 81 cents to $94.63.

In currency trading, the dollar ended mixed, gaining against the Japanese yen as Tokyo signaled only mild concern over trade frictions, but falling against the German mark amid continuing fears of higher German interest rates.

The dollar shrugged off complaints from U.S. Trade Representative Charlene Barshefsky that Japanese trade policies are unfair and news that until the dispute is resolved, the U.S. Maritime Commission will levy fines beginning today on Japanese cargo ships arriving at U.S. ports.

The dollar traded at 120.87 Japanese yen on Thursday in New York, up from 120.85 on Wednesday. But it fell to 1.8155 German marks from 1.8180.

Overseas, London’s FTSE-100 closed at 4,991.3, up 14.4 points, or 0.29%. In Tokyo, the Nikkei 225-stock average closed at 18,615.06, down 120.11 points, or 0.64%.

Market Roundup, D6