Wall Street Roller Coaster Gives Investors a Thrill Ride

Will the last person off the roller coaster please turn down the power!

The wizards of Wall Street have good reason to feel dizzy.

The Dow Jones industrial average last week first soared to a record high near 7100 on Tuesday, then took a dive on Thursday, off 160 points.

And many experts expect the market to remain on a rampage until the Federal Reserve decides March 25 on the direction of interest rates.

The Dow turned around on Friday, up 56.57 points, but off 65 points for the week.

Traders were whipsawed by reports that indicated both higher and lower inflation.

First came the report of strong retail sales in February, indicating an economy overheating.

Then came Friday's report of a drop in inflation at the wholesale level: 0.4 percent for February, the largest monthly decline since October 1994.

That report suggests no new underlying inflation.

Bond yields shot up (see chart) on the retail sales report and the possibility of higher inflation. And that sent stock prices downward.

"Bonds are the leaders right now," says Larry Wachtel, analyst with Prudential Securities Inc. "The bond market is the gatekeeper to the stock market."

When bonds react negatively, he says, stocks follow suit.

"The big debate" in financial markets is whether "there is hidden inflation," Mr. Wachtel says.

He thinks the Federal Reserve sees it lurking and will boost rates March 25.

Until last week, most analysts had assumed the Fed would not.

While markets can accommodate a modest, quarter-point rate hike, says Robert Barbera, chief economist with brokerage firm Hoenig & Co., in Port Chester, N.Y., investors can expect a volatile market.

The folks at Dow Jones & Co., meanwhile, are doing their part to ease the turbulence.

Last week, editors of The Wall Street Journal booted four companies from the 30-stock Dow Jones industrial average, the world's best-known stock index.

Out went Bethlehem Steel, Texaco, Westinghouse, and Woolworth. In marched Hewlett Packard, Johnson & Johnson, Travelers, and Wal-Mart.

The Dow is now slightly more high-tech, health, and consumer oriented - the go-go stocks of the 1990s.

Dow officials pointed out that they were merely modernizing the index. They updated the Dow last in May 1991.

But analysts quickly noted that three of the four newcomers have been sizzlers in recent years.

The outgoing four hobbled the rest of the index. Had the four new stocks been in place since 1991, the Dow would be pushing 8,000 points, instead of 7,000.

Last week's big loser was tobacco. Stocks went up in smoke late in the week, on news that Mississippi's highest court had ruled against the industry.

Still, some tobacco stocks came back the next day.

Until March 25, when the Fed decides on interest rates, hang onto to your seat on the roller coaster.