FINANCIAL MARKETS : Good News Is Bad News for Stocks, Bonds

Stocks sank as bond yields rose on Thursday after a raft of upbeat economic reports incited new fears of inflation and higher interest rates.

Investors, nervous that the new data would prompt the Federal Reserve to tighten credit again in an effort to head off inflation, sold a wide swath of stocks.

“Strong economic growth is bad news,” said John H. Shaughnessy, research director at Advest Inc. “The reports showed the economy entering the third quarter at a pretty fast pace. This raises the odds that the Fed will move sooner, rather than later, to raise rates.”

The Dow Jones industrial average fell 23.55 points to 3,854.63 as declining issues outnumbered advancers by about 13 to 9 on the New York Stock Exchange. Big Board volume totaled 305.38 million shares, down from Wednesday’s 330.31 million.

In the bond market, the Treasury’s main 30-year bond yield matched a 2 1/4-year high of 7.84% reached on Tuesday. On Wednesday, the yield closed at 7.81%. The long bond’s price, which moves in the opposite direction, dropped 5/16 point, or $3.13 per $1,000 in face value.

Traders were particularly stunned by a government report of surprisingly strong home sales, with the August rate leaping 9.7% even though mortgage rates jumped sharply this summer.

In addition, the government said that the nation’s gross domestic product grew at a 4.1% annual rate in the spring. The upward revision of the second quarter estimate was greater than many had expected.

Bonds also reacted negatively to the Labor Department’s report that the number of Americans filing first-time claims for unemployment benefits fell for the fourth straight week.

The combined signs of hefty growth gave the bond market another jolt of worries about inflation, which can whittle away the value of fixed-income investments.

On Wall Street, economically sensitive issues, such as manufacturing and basic industrial names, declined amid fears that higher interest rates could discourage consumer buying.

David Shulman, market strategist at Salomon Bros., said snags in reaching a world trade agreement are also troubling the stock market.

Among the market highlights:

* Alcoa Aluminum fell 1 3/4 to 85 3/4, General Motors was down 7/8 to 46 3/4, and Caterpillar declined 1/2 to 54 1/8. These are among the companies that could be expected to suffer if rising interest rates cut into consumer purchases.

* Interest-sensitive stocks were also falling in anticipation of a possible increase in short-term rates. Merrill Lynch fell 1 1/8 to 34 1/4, and Salomon Inc. was down 1 1/8 to 38 5/8.

* CBS Inc. tumbled 16 to 320 on further disappointment over its third-place showing among the four television networks for the first week of the new TV season.

* Church & Dwight Co., which makes the Arm & Hammer brand line of products, fell 1 1/2 to 22 5/8 after saying it expects third-quarter and year-end earnings to come in below Wall Street forecasts.

* USAir Group dropped 1 to 4 after the airline said it was deferring a quarterly dividend payment.

* Viacom Inc. and Blockbuster Entertainment Corp. shareholders approved the merger of the two companies. Viacom’s Class B shares fell 3/4 to 40 1/2 and Blockbuster dropped 3/4 to 27 1/2.

In overseas trading , Mexican stocks fell for a fourth consecutive session as investors fretted about the implications of the slaying of the ruling party’s second-highest official. The Bolsa index closed down 47.31 points, or 1.71%, at 2,717.51.

London’s broad-based Financial Times 100-share average plunged 46.2 points to 2,992.5, while Frankfurt’s 30-share average fell 32.7 points to 2,323.8. In Tokyo, the 225-share Nikkei average finished up 107.52 points at 19,615.12.