In one of its increasingly familiar turn-on-a-dime performances, the stock market overcame investors’ morning expectations of a trading debacle and closed Tuesday with the second-best point gain in the history of the Dow Jones industrial average.
The widely followed index registered a rise of 66.47 points, closing at 2,337.07, after first falling by nearly 20 points from the opening. The gain is surpassed only by the 69.89-point rise of April 3.
Wall Street professionals suggested that the market was buoyed by a sharp turnaround in the bond market, where traders had been reacting with Depression-style gloom to a sharp two-week slide in prices. Also contributing to the rally was a stream of unexpectedly bright quarterly earnings reports from major corporations. And the dollar firmed on currency markets.
The stock market rally, which began in the blue-chip issues of the Dow index, later spread to encompass most broader market indexes. Among others, the Standard & Poor’s index of 500 stocks favored by institutional investors gained 6.98 points to close at 293.07 and the New York Stock Exchange composite index gained 3.31 to close at 165.50.
Still, even to traders and investors accustomed to a stock market that can register near-record gains and record losses within days of each other, Tuesday’s hairpin turn was confounding.
“You could have cut the pessimism this morning with a knife,” said Henry M. Greenleaf Jr., president of HT Investors, a money-management unit of the Bank of Boston. “The word right off the opening bell was that the market was going to be a blood bath.”
Bonds Off Two Points
And by 10:45 a.m., the Dow index appeared to confirm that view. Moreover, bond prices were off by as much as two points, or $2 for every $100 of face value. But, shortly thereafter, bonds began gaining and stocks followed. By the close of trading, most bond prices had recovered all the initial losses.
Stock market specialists could find scant explanation in the news for the turnaround, but many agreed that the bond market has fallen so far that negative sentiment was finally played out and investors were poised to begin buying again. Bond slumps hurt the stock market by encouraging investors to shift their money out of stocks in search of bargains and greater investment returns in bonds. Bond rallies have the opposite effect.
“The market was oversold, negative sentiment was high and the bonds were set up for a violent reaction,” said Michael Metz, market strategist for the investment firm of Oppenheimer & Co. With bond prices gaining more strongly than they had on any day since the market began falling in mid-March, he said: “The fear of an open-ended rise in interest rates dissipated.” Interest rates move in the opposite direction from bond prices.
Turn to Corporate Earnings
With interest-rate concerns allayed, investors turned their attention to indications of stronger corporate earnings--a traditionally positive development for stock prices. Many leading companies this week began reporting significantly higher earnings for the quarter ended March 31, compared to the same period last year, an indicator that economists have been forecasting for more than a year.
Positive earnings reports are particularly concentrated in economically sensitive industries, such as technology, where Unisys, the product of the merger of Burroughs and Sperry, reported unexpectedly high gains. Other earnings advances were reported by 3M, Sears and Union Carbide. All moved higher in Tuesday’s trading, as investors grasped at indications that the economy will finally show its long-awaited expansion.
General Motors stock, an important component of the Dow industrials, rose by $3.375 to $89.125 on expectations that its earnings report, due today, will also be positive.
As the day wore on, traders said, enthusiasm broadened from what had initially been a rather narrow advance.
Early Market Breadth ‘Poor’
“At first I thought the rally was suspect because its breadth was so poor,” Greenleaf said. Early in the afternoon, when the Dow industrials were showing a gain of only about 20 points, the broader market was still showing that about 900 stocks were falling on the New York Stock Exchange and 600 were up. By the end of the day, the figures were reversed.
The market’s advance also gathered steam at the very end of the trading day as investors who had bet on a continued slide--those who had sold stocks short (by selling borrowed shares of stock) or bought stock index futures contracts--moved to cover their short positions by buying shares. Nearly 40 points of the Dow index’s 66.47-point total gain came in the last hour or so of trading.
The dollar closed higher, helped by the buoyancy of the stock and bond markets. The U.S. currency closed in New York at 1.8220 West German marks, up from 1.8095 marks at Monday’s close. Against the Japanese yen, it rose to 142.55 yen from 142.15 at the previous close.