Tax Sales Push Stocks Down; Dow Slips 11.81
The stock market stumbled over the new tax law on Tuesday as investors rushed to cash in on the old regulation providing lower tax rates for long-term capital gains. The Dow Jones average of 30 industrial stocks closed at 1,914.37, down 11.81 points.
Losers outpaced gainers by nearly three to one, and volume on the New York Stock Exchange totaled 188.70 million shares, compared to Monday’s 157.61 million.
Broad market indicators slipped. The New York Stock Exchange composite index fell 1.30 to 140.72, and Standard & Poor’s 500-stock index slid 2.41 to 246.34.
“It looks mostly like last-minute tax selling,” said Alan C. Poole, a market strategist at Laidlaw, Adams & Peck, a securities firm in Princeton, N.J. “It’s very tempting, if you owned a stock for years, to get out with just a 20% tax on it.”
Long-term capital gains lose their preferential treatment under the new tax law that begins to take effect on New Year’s Day. Many investment advisers encouraged clients to avoid next year’s higher tax rate by selling stocks by Tuesday’s close in order to ensure the transactions are settled by the end of the year.
That aside, however, Poole added that he was also worried about the “very wide breadth of . . . across-the-board selling.”
“If it were only tax selling, it would be more selective,” he said. “It tells me a lot of people are really worried about what’s going to happen. I think there’s a big liquidation going on.”
Market’s Overall Resilience
Many other analysts have predicted that the market will break through the 2,000 barrier before Jan. 1, basing their optimism on the market’s overall resilience in the face of the recent spate of bad news, including the Iranian arms imbroglio and the insider trading scandal. And, looking past Christmas, market statistics show that the end of the year usually brings a rally.
According to the Stock Trader’s Almanac, compiled by Yale Hersh, this only failed to happen seven times in the last 33 years--in 1955, 1966, 1968, 1977, 1979, 1981 and 1984.
AT&T; led the Big Board’s most active issues, gaining to 25 3/4. IBM was down 2 5/8 at 120 1/2 after reports that several brokerages cut their 1986 and 1987 earnings estimates for the company.
American Express was down 1 3/8 to 58, and USX Corp fell 1/8 to 21 1/2. Exxon was up 5/8 at 73 1/2; Philips Petroleum was up 1/8 at 11 7/8, and Mobil was down 5/8 at 39 3/4.
Auto Issues Mixed
Among auto issues, Ford Motor was down 1 3/4 at 55 7/8, General Motors was up 3/8 at 66 3/4 and Chrysler was down 3/8 at 38 3/4.
Greyhound rose 1 3/4 to 31 7/8 after revealing plans to sell its intercity bus unit for $350 million to a group led by Dallas investor Fred Curry.
Retailers slumped amid reports that Christmas sales were not going well. Federated Department Stores was down 1 at 86 5/8, K mart was down 1 1/8 at 45 and Sears was down 1 1/8 at 40 3/8.
Meanwhile, bond prices were little changed as long-term interest rates edged lower and short-term rates higher in thin markets.
Many investors already have left the markets for the year; those who remain are unlikely to take big positions in the thin markets expected over the next week and a half, analysts said.
“It was slow yesterday, slower today, and we think it will be probably close to dead tomorrow,” said Steven Wood, economist for BankAmerica Capital Markets Group.
Long-term bond prices moved briefly lower following the Commerce Department’s report that durable goods orders for November were up 5.9% following a 4.7% drop in October, the biggest monthly rise in two years.
However, analysts noted that much of that strength came from the volatile defense category, where orders soared 110.8% in November, and prices quickly recovered, Wood said.
Another bullish factor came from oil futures prices, which slumped by about 31 cents after surging more than $1 a barrel on Monday. Although the Organization of Petroleum Exporting Countries has reached a production agreement aimed at boosting prices, many analysts doubt whether the agreement will remain effective.
Higher oil prices could help push inflation higher, which would depress the value of fixed-income investments such as bonds.
Treasury Bills Rise
In the secondary market for Treasury securities, prices of short-term governments were up about 1/32 point, intermediate maturities were up as much as 3/8 point and 20-year issues rose 5/16 point.
The Treasury’s bellwether 30-year bond finished the day up about 5/32 point with its yield at 7.34%.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.08 to 118.95. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, rose 1.35 to 1,243.88.
In corporate trading, industrials and utilities rose point in quiet trading, according to the investment firm Salomon Bros.
Among tax-exempt municipal bonds, general obligations were up and revenue bonds rose 1/2 point in light trading.
Yields on three-month Treasury bills were up 2 basis points to 5.54%. A basis point is one-hundredth of a percentage point. Six-month bills rose 6 basis points to 5.61%, and one-year bills were up 1 basis point at 5.60%.
The federal funds rate, the interest on overnight loans between banks, traded at 6.3125%, down from 6.5% late Monday.
