Stocks fall again amid bond rout
Rising interest rates suddenly are giving global stock markets a fear of heights.
Shares slumped worldwide Thursday as long-term bond yields surged and several central banks boosted their bellwether short-term rates.
U.S. market indexes suffered their biggest declines in three months, with the Dow Jones industrial average sliding 198.94 points, or 1.5%, to 13,266.73, its third straight loss.
But a major factor driving interest rates up -- the strong world economy -- also has underpinned the powerful rally in stocks this year, analysts note.
That’s why many market pros say they aren’t expecting more than a modest pullback in share prices.
“I see people selling stocks because there was a little bloodbath in the [bond] market, and that really looks like a mistake,” said John Bollinger, head of Bollinger Capital Management in Manhattan Beach. “Investors ought to have their shopping lists out.”
Key U.S. market indexes hit record highs Monday and are down 3.5% or less from those peaks. That has trimmed their year-to-date gains to the mid-single digits. The Dow is up 6.4% this year.
Still, the appetite for U.S. stocks in the near term may depend on the bond market and the direction it sets for other interest rates.
The long-suffering housing market could be weakened further if mortgage rates continue to rise. Tighter credit could also damp the consumer spending that drives the economy. On Thursday, U.S. retailers generally reported tepid May sales.
The bond market, however, acted Thursday as if the domestic economy was roaring. The annualized rate, or yield, on the 10-year Treasury note -- a benchmark for mortgage and other long-term rates -- soared to an 11-month high of 5.13% from 4.97% on Wednesday.
Bond yields rise as the securities’ prices fall. A rush of selling Thursday sent bond prices plummeting, deepening a decline that began in March.
Many investors have been edging away from bonds worldwide in recent months on fears that surprisingly robust global economic growth could boost inflation pressures, which could drive interest rates even higher.
On Tuesday, Federal Reserve Chairman Ben S. Bernanke reiterated that the central bank remained concerned about inflation. Those remarks appeared to close the door on lingering hopes that the Fed might cut short-term rates soon to help the downtrodden housing market.
On Wednesday, the European Central Bank raised its key rate from 3.75% to 4%, citing economic strength and the need to restrain inflation.
And on Thursday, the central banks of New Zealand and South Africa also tightened credit, which for some bond investors cemented the idea that global interest rates were likely to continue rising.
For investors who’ve been expecting rates to hold steady or decline, the news this week has been “a strong dose of smelling salts,” said Michael Darda, an economist at MKM Partners in Greenwich, Conn. “There’s going to be [economic] growth. There’s going to be some inflation. And there are not going to be any rate cuts.”
Bond yields also have soared in Europe and Japan in recent days. The yield on the 10-year German government bond jumped to a four-year high of 4.54% on Thursday from 4.46% on Wednesday.
Economic data from Europe, Japan and many developing countries this year have been upbeat, offsetting fears that the U.S. growth slowdown in the first quarter would drag down the world economy.
“It’s the global economy that’s moving us now, rather than the other way around,” said Joe Carson, an economist at money management firm AllianceBernstein in New York.
Still, many Wall Street pros say U.S. interest rates aren’t likely to rise dramatically from current levels. Even though the domestic economy has perked up this spring, it isn’t zooming, they say.
The manufacturing sector has gotten a boost from export demand, but as for consumer spending, “Demand is still on the softer side,” said Peter Kretzmer, an economist at Banc of America Securities in New York.
“I would argue that the lion’s share or maybe even the vast majority of the move up in rates is behind us,” said Bob Doll, chief investment officer at BlackRock Inc. in New York.
The 10-year T-note has risen 0.64 of a point since early March, when it was 4.49%.
If rates stabilize soon, the stock market should bounce back from the sell-off, Doll said. “We still see stocks ending the year higher than they are today,” he said.
Share prices have been supported by the global economic expansion, which lifted U.S. companies’ earnings more than expected in the first quarter.
A growing risk for stocks, however, is that some investors could begin to find bonds and other income-paying accounts more attractive than equities. That could make it tougher for Wall Street to regain its footing.
Harold Klein, a Palm Springs retiree, said he recently put more money into bank savings certificates paying about 5.5%. He looks at rising interest rates as an opportunity to earn more on his money, he said.
Many analysts say stocks simply are overdue for a respite. The last significant pullback, in late February and early March, shaved 5.9% off the Standard & Poor’s 500 index.
tom.petruno@latimes.com
Staff writer Kathy M. Kristof contributed to this report.
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Pulling back
How some major stock market indexes have fallen from their recent peaks, and their year-to-date gains:
*--* Change from: Market/index Peak Dec. 31 U.S./Nasdaq Composite -2.8% +5.2% U.S./Dow Industrials -3.0 +6.4 U.S./S&P; 500 -3.1 +5.1 Canada/ S&P-TSX; -3.1 +6.2 Mexico/IPC -3.4 +17.9 U.S./ Russell 2,000 -3.5 +4.8 Germany/DAX -4.6 +15.5 China/ Shanghai comp. -10.2 +45.4
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Source: Bloomberg News
