Dow Falls 18.28; Bond Slump Affects Stocks
THe stock market fell Monday in a broad, steep plunge largely attributed to a sharp slump in the bond market amid fears of rising inflation and higher interest rates, analysts said.
The Dow Jones average of 30 industrial stocks closed at 1,912.12, down 18.28 from Friday.
Losers outpaced gainers by about three to one on the New York Stock Exchange, with 1,200 issues lower, 416 higher and 432 unchanged.
Big Board volume totaled 99.80 million shares, compared to Friday’s 48.86 million shares. Friday’s volume was the lowest in two years.
Credit watchers said interest rates moved higher and bond prices moved sharply lower, largely in response to sharp drops in the value of the dollar on world currency markets.
They also cited fears that higher oil prices would spark renewed inflation and some predictions that new government statistics may show the economy stronger than had been expected.
Cheaper rates for the dollar make U.S. investments less attractive to overseas investors, causing weaker bond prices. Weakening bond prices often have a similar impact on the stock market.
Pessimism a Factor
Thomas Czech, an analyst at the Blunt Ellis & Loewi securities firm in Milwaukee, said the strong yearlong expansion of the nation’s basic money supply--by 14.5%, according to figures released by the Federal Reserve Board on Monday--and the slumping dollar “more or less preclude any easing (of interest rates) by the Fed” because of concern over inflation.
The pessimism over interest rate prospects was behind the fall of the bond market, and in turn, stocks, he said.
Hildegarde Zagorski, an analyst at Prudential-Bache Securities, noted that Friday’s 3.52-point gain in the Dow industrial index came mainly from a large gain in the price of Merck & Co., which is among the 30 stocks that make up the index.
Merck gained more than 5 points Friday and more than 12 points for the week, but fell amid profit taking Monday, closing down 4 points at 125.
Union Carbide led the Big Board’s most-active list, down 1/8 at 22 5/8.
IBM was off by 1 3/8 at 120 5/8, Xerox lost 1 5/8 to 61 and Texas Instruments declined 2 1/8 to 116. General Electric fell 1 to 86 3/4.
Pandick Inc. fell 1/2 to 25. Chas. P. Young Co. said it would offer $28 per share for all of Pandick’s stock.
Bond prices fell sharply, and short-term interest rates rose in thin trading as investors reacted to a weak dollar.
The Treasury’s key 30-year issue was off nearly 1 points, or about $12.50 per $1,000 face amount, with the yield rising to 7.43% from 7.33% late Friday.
Prices of corporate and municipal issues also were lower.
Fuel for Drop
Jay Goldinger, an analyst with Cantor, Fitzgerald & Co., said a weak dollar and a sharp rise in the federal funds rate fueled the drop in the bond market.
The dollar was down against virtually all foreign currencies in light foreign exchange trading in the United States and overseas.
The federal funds rate, the interest on overnight loans between banks, traded at 9%, up sharply from 6 3/8% late Friday.
Analysts attributed the rise in federal funds to a seasonal year-end demand for short-term funds.
In the secondary market, short-term governments were off more than 1/8 point, intermediate maturities fell more than 1/2 point and 20-year issues were down 1 1/8 point, according to price quotations provided by Telerate Inc.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was off 0.66 to 118.28.
The Shearson Lehman daily Treasury bond index, which makes a similar measurement, fell 6.48 to 1,237.46.
Yields on three-month Treasury bills rose 11 basis points to 5.67%. Six-month bills were up 10 basis points to 5.68% and one-year bills were 9 basis points higher at 5.66%, according to Telerate.
