Stocks Drop Amid Fears That Rates Will Rise Soon

Stocks sagged Friday, pushing the technology-dominated Nasdaq to its biggest weekly drop in 2 years, on worries that the Federal Reserve would move closer to raising interest rates at its meeting next week.

U.S. Treasury prices rose, dropping the yield on the benchmark 10-year note to 4.50%, from 4.54% Thursday. (Bond yields and prices move in opposite directions.) The dollar fell slightly against the euro but rose versus the yen, while crude oil prices had mild gains and precious metals bounced back from sharp declines earlier in the week.

Oil stocks helped limit the wreckage on Wall Street after ChevronTexaco reported strong results. The Standard & Poor’s integrated oil and gas index was among the day’s better-performing sectors, rising 0.3%.

But Cisco Systems dragged down the Nasdaq composite index, which fell for the fifth straight day and had its biggest weekly drop since April 2002.

Yahoo and other Internet-search companies fell for a third straight day on concern that shareholders would shift money into Google, the most-used search site that filed Thursday to raise $2.7 billion in an initial public offering.

The Dow Jones industrial average fell 46.70 points, or 0.45%, to 10,225.57. The Standard & Poor’s 500 index gave up 6.66 points, or 0.60%, to 1,107.23. Nasdaq sank 38.63 points, or 1.97%, to 1,920.15.

For the week, the Dow dropped 2.3%, the S&P; 500 lost 2.9% and Nasdaq fell 6.3%. For April, the Dow fell 1.3%, the S&P; 500 sank 1.7% and Nasdaq fell 3.7%.

Fears that the Fed will soon raise interest rates to curb inflation have weighed on Wall Street. Investors are uncertain when the central bank will begin raising interest rates amid improving economic indicators and signs of budding inflation.

“There’s a strong sensitivity now to interest-rate increases, and high-priced stocks such as tech stocks are generally more sensitive to that,” said Ed Peters, chief investment officer at PanAgora Asset Management in Boston.

The Fed is scheduled to meet on Tuesday to decide on interest-rate policy. Although investors expect it to leave its benchmark federal funds rate unchanged at 1%, analysts believe the Fed will lay the groundwork in its policy statement for a rate increase that many expect will come in August.

Strong corporate earnings do not appear to be allaying fears. First-quarter profits in the S&P; 500 have risen 27% from a year earlier, but Wall Street pros think that pace is unsustainable, even with the tailwind of a strengthening economy.

“Companies are looking fully valued,” said Tom Hanson, portfolio manager at Pacific Global Investment Management in Glendale. “There’s also a concern that maybe this is the earnings peak.”

Declining shares led advancers more than 4 to 3 on the New York Stock Exchange. Trading was heavy on both the NYSE and Nasdaq, where Cisco Systems was the most active stock. Shares of Cisco, which makes equipment that directs Internet traffic, fell $1, or 4.6%, to $20.91 on a disappointing financial forecast from rival Foundry Networks.

Yahoo dropped $4.18 to $50.53, bringing its three-day drop to 12%. Ask Jeeves shed $3.38 to $35.37, while Infospace lost $2.71 to $32.91.

ChevronTexaco shares rose $1.20 to $91.55 after it posted a 33% rise in quarterly profit. But Procter & Gamble shares fell 22 cents to $105.75 despite reporting that its quarterly profit jumped 20%.

Market Roundup, C4