NEW YORK (CNNfn) - U.S. stocks plunged Friday after the latest government data revealed surprising strength in the nation's economy, sparking fears the Federal Reserve next week will raise interest rates aggressively to preempt inflation.
Stock investors sold on the news, worried that steeper borrowing costs will hurt corporate profit. The Nasdaq composite index fell nearly 4 percent for its second-biggest point loss on record. Financial stocks, ever sensitive to higher interest rates, also dropped, sending the Dow Jones industrial average to its seventh-steepest point fall.
The losses came after the nation's gross domestic product, the broadest measure of the economy, and the employment cost index, a measure of wage inflation, soared past analyst's expectations.
Many analysts who expected a small interest rate hike at the Fed's meeting ending Wednesday quickly raised their forecasts.
"One of the things that happened today is the sneaky suspicion that the Fed my raise interest rates by 50 basis points (half a percentage point) instead of the 25 basis points (quarter of a percentage point) because of these economic numbers," Mark Stoeckle, portfolio manager at Liberty-Colonial's U.S. Growth and Income Fund, told CNNfn's Street Sweep.
The Nasdaq composite index plunged 152.54 points, or 3.77 percent, to 3,887.02. On the week, the tech- heavy index is down 347.13 points, or 8.20 percent, its worst weekly performance on record.
The Dow Jones industrial average dropped 289.15 points, or 2.62 percent, to 10,738.87, building on Thursday's losses. On the week, the blue chip benchmark lost 511.9 points, or 4.55 percent. The Dow's financial stocks led the way down -- J.P. Morgan (JPM: Research, Estimates) lost 7-9/16 to 118-1/16, Citigroup (C: Research, Estimates) slid 2-7/8 to 56-1/8, and American Express (AXP: Research, Estimates) fell 4-11/16 to 158-1/4.
The broader S&P 500 dropped 38.41 points, or 2.75 percent, to 1,360.15. The S&P ended the week off 80.9 points, or 5.62 percent.
More stocks fell than rose, with decliners on the New York Stock Exchange beating advancers 2,061 to 974. Nasdaq losers topped winners 2,878 to 1,280.
Volume was heavy, with 1.59 billion shares changing hands on the Nasdaq. More than 1 billion shares traded on the Big Board.
In other markets, bonds rose and the euro slipped farther below the psychologically significant $1 mark. The dollar climbed sharply against the yen.
Strong GDP, ECI
The nation's gross domestic product grew 5.8 percent in the fourth quarter, the Commerce Department said. Separately, the employment cost index rose 1.1 percent in the same period, the Labor Department said.
Analysts said the surprisingly strong data gives the Fed more ammunition to tighten credit, in order to pre-empt rising inflation.
"This data, all of it stronger than expected, probably gives (Fed Chief Alan Greenspan) more reason to be a bit more aggressive at the meeting next week," Ron Hill, partner and equity strategist at Brown Brothers Harriman, told CNNfn.
Hill, like others, anticipates the Fed raising rates by a half percentage point at its meeting ending Wednesday. That would bring its main lending rate to 6 percent, the highest in five years.
"What these numbers have done this morning is raise a question: Does the Fed have the nerve to raise by 50 basis points (a half percentage point) next week?" asked Tom Gallagher, head of U.S. equities at CIBC World Markets.
The Fed raised interest rate three times last year. But tighter credit has had little apparent effect. Unemployment remains at a 30-year low, consumer spending is buoyant, and the stock market -- though off its highs -- has created trillions of dollars in paper wealth.
Earnings parade resumes
Despite the sell-off, some stocks gained Friday. American Depositary Receipts of Ericsson (ERICY: Research, Estimates) surged 4-7/16 to 70-1/16, after the Swedish mobile-phone maker reported a 39-percent jump in fourth-quarter pretax income, beating forecasts. Ericsson also declared a 4-for-1 stock split.
But Ericsson's gains didn't bring other mobile phone makers along for the ride. Nokia (NOK: Research, Estimates) fell 1 to close at 177-1/2. Motorola (MOT: Research, Estimates) lost 7-3/4 to end at 128-/14.
Lockheed Martin (LMT: Research, Estimates) fell 9/16 to 18-7/8, after the aerospace manufacturer reported fourth-quarter operating earnings of 59 cents a diluted share, in line with analysts' estimates.
Fourth-quarter earnings season is shaping up to be a strong one. Of the 295 companies in the S&P 500 that have reported results, 195, or 66 percent, have beaten analysts' forecasts, according to earnings tracker First Call Corp. Sixty-three met Wall Street targets. Only 19 came in below expectations.
State of the drug makers
Drug stocks rose Friday after President Clinton, in his State of the Union speech Thursday, said nothing to threaten the sector. Many investors feared Clinton would make an aggressive call for lower drug prices. But instead he only reiterated his proposal to add a partial prescription drug benefit under the federal Medicare program.
"It's somewhat more the olive branch than the steel weapon," said Neil Sweig, pharmaceutical analyst at Ryan, Beck Southeast Research. But "how long that lasts, of course, is anyone's guess."
Merck (MRK: Research, Estimates) rose 2-1/4 to 76-3/8, Pfizer (PFE: Research, Estimates) jumped 11/16 to 35-3/16, and Johnson & Johnson (JNJ: Research, Estimates) gained 4 to 84-/12.
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