Dow Dives 51.71 in 4th-Largest Drop; Jitters Over Inflation, Dollar Blamed
Continued worries about higher inflation, rising interest rates and the falling dollar sent the stock market reeling Monday as the Dow Jones average of industrial stocks posted its fourth-largest single-day drop.
The widely watched indicator of blue chip issues fell 51.71 to finish at 2,287.07, its lowest close since March 30 and 4.9% below its record high close of 2,405.54 on April 6. Most of Monday’s fall came in the last half an hour of trading because of computerized “sell programs” used by institutions, which have become increasingly bearish in recent days, analysts said. Until the last 30 minutes, the Dow generally ranged only five to eight points below Friday’s close.
Declines led advances on the New York Stock Exchange by the decisive margin of 1,436 to 278. Volume was 181.03 million shares, compared to 169.53 million on Friday.
Monday’s selloff was accompanied by the same conditions--rising interest rates and falling bond prices--that had helped push the Dow index down by more than 51 points in all of last week, analysts said.
“There’s been a big change in psychology. Investors now believe that interest rates are not going down and that inflation will be worse than expected,” said Michael Metz, market strategist at Oppenheimer & Co. in New York.
Recent declines in the dollar have sparked fears of higher inflation and higher interest rates, which in turn could derail the bull market. Investors worry that if the greenback falls much further, it may force the Federal Reserve to boost interest rates to support the currency. That would be likely to persuade foreigners to continue investing in U.S. Treasury securities, helping to finance the U.S. budget deficit.
Interest rates already have risen sharply. The yield on the bellwether 30-year Treasury bond soared to 8.36% on Monday, up from only 7.55% a month ago. Such higher rates have helped drive down bond prices, which move in the opposite direction of interest rates.
Some analysts on Monday predicted another increase in banks’ prime lending rate, a benchmark for business and consumer loans. Many banks raised the prime March 31 to 7.75% from 7.5%, the first such hike since June, 1984.
Also fueling fears of higher interest rates and inflation were rumors late Monday that the federal government may report today a worse-than-expected trade deficit for February. Investors fear that U.S. officials may seek to drive the dollar down further in an effort to reduce the trade deficit, which also in turn could force the Fed to nudge interest rates higher.
Texaco Down All Day
Monday’s last-hour program selling by institutions--triggered in part by these inflation and interest rate worries--reversed a trend of recent weeks, Oppenheimer’s Metz said. Recently, program trading had been driving the market up, he said.
Dennis E. Jarrett, technical analyst at Kidder, Peabody & Co. in New York, said some large institutions had been hoping for a rally on Monday but, when that did not take place, they sold stock index futures. That drove prices of those futures lower than the underlying stocks that make up the indexes. That, in turn, activated computerized stock-selling programs, where institutional investors attempt to capitalize on discrepancies between the prices of the futures and those of the underlying stocks.
Jarrett added that while the Dow index was hurt by a decline in the stock of Texaco--one of the 30 stocks that make up the Dow industrial average--that was not a major factor in the last-minute selloff. Texaco, which closed off 3 3/8 to 28 1/2 following news Sunday of its filing for bankruptcy protection, was down all day, Jarrett noted.
Other big losers among Dow index members included American Can, which fell 3 to 44 1/2; Du Pont, off 4 at 111 1/2; GE, down 4 7/8 to 102 1/8; McDonald’s, off 2 1/2 to 76 1/8, and Sears, declining 2 1/2 to 51.
Mining Stocks Rise
Bucking the weak market was International Business Machines, another Dow component, which reported better-than-expected first-quarter earnings and posted a gain of 2 5/8 to close at 147 5/8.
Mining stocks also ran counter to the market, aided by fears of higher inflation. ASA rose 2 3/8 to 71 3/8, Hecla Mining gained 3/8 to 23 1/8, Homestake advanced 1 7/8 to 40 and St. Joe Gold climbed 1 to 20 1/2.
Monday’s 51-plus point drop in the Dow index was still far smaller than the all-time one-day decline of 86.61 on Sept. 11, 1986. Monday’s fall also represented only a 2.2% decline in the Dow, far less than the historic 12.8% loss on Oct. 28, 1929, when the market, then at a much lower level, fell 38.33.
Among broader market indexes on Monday, Standard & Poor’s index of 400 industrials fell 7.94 to 331.70 and S&P;’s 500-stock composite index was down 6.87 to 285.62. The NYSE’s composite index fell 3.58 to 162.14. The American Stock Exchange’s market-value index fell 4.00 to 334.08. The NASDAQ composite index closed at 423.71, down 7.22.
Analysts differed on whether the recent selloff would continue.
Oppenheimer’s Metz suggested that worried investors may switch money from stock mutual funds and to safer money-market funds. That, along with more futures selling by institutions, could lead to a “precipitous drop,” Metz said.
But Al Frank, editor and publisher of the Prudent Speculator, a Santa Monica newsletter, said the the latest correction is probably over. He said the high ratio of issues declining versus advancing in Monday’s trading is indicative of a market that is becoming oversold, not overbought.
“Our attitude is to hunker down and buy stocks into the decline,” Frank said, adding that he expects to see the Dow index hitting 2,700 this year and 3,600 next year.
