Dow down, but mood up

NEW YORK -- The Commerce Department reported Friday that despite war anxieties, the U.S. economy managed to grow at an annual rate of 1.6 percent in the first quarter.

But that was not enough to keep investors from cashing in for profits for a second day, pushing stocks sharply lower on worries that they have risen too far, too quickly. The Dow Jones industrials dropped more than 130 points.

Despite the declines, analysts say the mood on Wall Street has been lifting as a majority of companies have reported better-than- expected first-quarter profits. But for that good feeling to last, market observers say, there has to be a longer-term trend of encouraging earnings and economic news.

Wall Street sentiment is improved, said Susan L. Malley, chief investment officer for Malley Associates Capital Management in New York. "But that doesn't make me feel it is going to be easy for the Dow to break out of this trading range, where 8,500 has been the top that it has failed to break through," Malley said.

She added: "I am hopeful that this is the beginning of the cycle when earnings come in better than expected. If it can continue through the next quarter, then I think we have a good chance of breaking through that range."

The Dow closed down 133.69, or 1.6 percent, at 8,306.35. Along with a loss of 75.62 on Thursday, the blue chip declines more than wiped out the 186.76 gained on Tuesday and Wednesday.

The broader market also pulled back for a second day. The Nasdaq composite index fell 22.69, or 1.6 percent, to 1,434.54. It had closed Wednesday at its highest level since Dec. 2. The Standard & Poor's 500 index declined 12.62, or 1.4 percent, to 898.81.

The major gauges ended the week mixed. The Dow forfeited 0.4 percent, but the Nasdaq and the S&P each rose 0.6 percent.

The declines came amid light trading volume, whereas the gains earlier in the week were made during heavy trading, which analysts believed was a sign of newfound resilience.

"Yesterday and today the pullback is on lighter volume. It always makes me happy to see that. . . . I still think we are in an uptrend, but I don't think it will be seamless," said Tony Cecin, director of institutional trading at US Bancorp Piper Jaffray in Minneapolis.

The Commerce Department report showed the first-quarter growth rate of the nation's gross domestic product -- the broadest measure of economic health -- was better than the 1.4 percent rate registered in the fourth quarter, but was still considered rather soft. Analysts had expected GDP to come in around 2.3 percent.

But the paltry increase from January through March did mean that GDP remained in positive territory, something that was not assured in February when economic activity nearly came to a standstill because of blizzards and anxiety about possible war in Iraq.

There were growing concerns that the country could be headed for a double-dip recession, especially if the impending war interrupted oil supplies and triggered terrorist attacks.

However, as the war ends without the worst-case scenarios, analysts said the economy should gain strength in the months ahead.

"Now that the war is over, spring is here and confidence is improving, concerns about a double-dip recession should be set aside," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

In a second report, the Commerce Department said sales of new homes shot up by 7.3 percent in March, far above what analysts had expected, because of continued low mortgage rates and better weather.

Meanwhile, the University of Michigan's index on consumer sentiment for April rose to 86.00 as war fears lessened, according to a report by Dow Jones Newswires. The reading increased from 77.6 for March and was better than the 84.00 level economists had predicted.

Still, stocks retreated slightly.

R.J. Reynolds Tobacco dropped $6.02 to $28.18 after slashing its 2003 earnings outlook, although first-quarter results beat analysts' expectations by 6 cents a share.

Sara Lee fell 84 cents to $16.96, adding to Thursday's loss of $1.94 when it missed earnings expectations by a penny a share. Additionally, on Friday Banc of America Securities downgraded Sara Lee to "neutral" from "buy."

Brokerage house downgrades hurt other stocks as well.

General Motors fell $1.04 to $35.62 after UBS Warburg cut its rating on the stock to "neutral" from "buy," while Ford declined 54 cents to $9.96 after the brokerage downgraded it to "reduce" from "neutral."

Consumer products maker 3M fell $2.82 to $122.90 after Banc of America Securities cut its rating to "neutral" from "buy."

Declining issues outnumbered advancers 9 to 5 on the New York Stock Exchange. Consolidated volume was a very light 1.69 billion shares, below Thursday's 2 billion shares.

The Russell 2000 index, the barometer of smaller company stocks, fell 3.77, or 1 percent, to 388.50.

Overseas, Japan's Nikkei stock average finished Friday down 2 percent. In Europe, France's CAC-40 lost 1.3 percent, Britain's FTSE 100 declined 0.7 percent and Germany's DAX index fell 1.9 percent.

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