Markets Drop Sharply as Interest Rates Rise
Stock and bond markets fell sharply as interest rates jumped in the credit markets Friday.
The Dow Jones average of 30 industrials, which hit record highs Wednesday and Thursday, dropped back 10.86 to 1,316.42. The decline was the biggest for the average since it tumbled 16.01 points May 1, but it still managed to finish the week with a net gain of 1.01 points.
Before the market opened, the Labor Department reported that the civilian unemployment rate held steady at 7.3% in May, with gains in total jobs, non-farm payrolls and average factory workweek. Analysts said this added up to a stronger economy than many observers had expected.
Traders in the bond market took the news as a negative.
Some brokers argue that the rally in stocks need not stall if interest rates stop falling. But declining rates have been widely described as the main force pushing up the market in recent weeks.
Trans World Airlines rose 1/2 to 19 1/2 and Resorts International class A shares, traded on the American Stock Exchange, dropped 5/8 to 43 5/8 on the basis of reports that Resorts was preparing an offer to acquire TWA. The airline is the subject of a hostile takeover bid by financier Carl C. Icahn.
Computer and technology issues, after staging a rally Thursday, came under renewed selling pressure. International Business Machines fell 2 3/8 to 127 3/8, Digital Equipment dropped 2 3/4 to 97 7/8, Burroughs fell 1 3/8 to 61 3/8 and Hewlett-Packard fell 1 to 33 1/8. However, Sperry climbed 3 7/8 to 54 7/8 on takeover rumors and speculation.
Other losers in the blue-chip sector included Merck, down 2 1/2 at 111; Exxon, down 1 5/8 at 50, and Sears, Roebuck, down 1 at 37 3/4. On Thursday, Sears reported a 1.3% decline in retail sales for May.
Gulf & Western climbed 2 1/2 to 41 1/8 amid rumors that the company might be planning to sell some or all of its consumer products operations.
Large blocks of 10,000 or more shares traded on the NYSE totaled 2,033, compared to 2,301 on Thursday.
The daily tally on the Big Board showed about five issues falling in price for every three that gained ground.
Among common market indicators, the NYSE’s composite index dropped 0.72 to 109.97; Standard & Poor’s index of 400 industrials fell 1.74 to 209.39; S&P;'s 500-stock composite index was down 1.38 at 189.68; NASDAQ’s composite index for the over-the-counter market lost 0.82 to 291.03; the Amex’s market-value index closed at 228.14, down 1.15, and the Wilshire index of 5,000 equities closed at 1,954.138, down 11.516.
Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 121.03 million shares.
Bond prices tumbled by as much as $20 for every $1,000 in face value and interest rates jumped as the government reported the surge in employment in May. Prices of long-term government bonds move in the opposite direction from interest rates.
Traders had said that, if the report had shown a decline in employment, the Fed might have had to take new steps to stimulate the economy. Analysts said the increase dashed those hopes.
Henry Kaufman, chief economist for Salomon Bros., for instance, said the unemployment statistics “suggest that the Federal Reserve need not rush to accelerate the pace of monetary accommodation.”
“The data tend to support the belief that overall economic activity is not eroding further and that some recovery from the very meager first-quarter rate is occurring,” he said.
He said another cut in the discount rate, the Fed’s interest charge on loans to banks, “in the next few weeks is not likely.”
In the secondary market for Treasury bonds, prices of short-term issues fell by between 1 point and 1 7/8 points, while intermediate and long-term issues were off 2 points, according Salomon Bros.
In the corporate markets, industrials fell 1 3/4 points and utilities were down 2 points in light activity. Among tax-exempt municipal bonds, general obligations and revenue bonds fell 3/4 point, Salomon Bros. said.