Wall Street Gets the Blues; Dow Plummets 44.99 : Index Falls to Lowest Point Since May 31 as Investors Fret About Interest Rates
The prospect of higher interest rates sank in on Wall Street Wednesday, prompting another selloff that sent the Dow Jones industrial index down 44.99 points.
The widely followed index ended the day at 2,034.14, its lowest point since May 31. Traders said investors were continuing to react to Tuesday’s announcement by the Federal Reserve Board that it was raising the discount rate to 6.5% from 6%. The move was widely interpreted as determination by the Fed to limit inflation, presaging further rises in interest rates generally. The Dow index had dropped 28.27 points following the news Tuesday. Wednesday’s drop brought the loss over the last five sessions to 99.93 points.
Bond prices also fell sharply Wednesday as anxiety about the Fed move pushed interest rates to their highest level this year.
Most Wall Street analysts, however, said they doubted that the Fed intends to push up interest rates drastically, especially in the final months before a presidential election. Traders also took comfort from the fact that the stock market’s drop was due mainly to a lack of enthusiastic buyers rather than to a massive liquidation of shares.
Trading volume Wednesday wasn’t exceptional. On the New York Stock Exchange, volume was 200.95 million shares, which as usual included a high proportion of stock that changed hands in so-called dividend plays, in which investors purchase the shares of utilities and other high-dividend-bearing stocks just long enough to be paid their dividends. On Tuesday, trading volume totaled 200.71 million shares.
Assumes the Worst
Wednesday’s dividend-play trading included 29.2 million shares of Consolidated Edison Co. and 5.1 million shares of Panhandle Eastern Corp.
The Fed move on Tuesday renewed fears of a recession. “The markets seemed to assume the worst,” said Peter Canelo, a market strategist at Bear, Stearns & Co. But, he said, “this is not the beginning of a crash.”
He noted that stocks now are selling for about 12 times companies’ annual earnings per share, compared to the heady 18 or 19 times earnings that was common before the Oct. 19 crash. He also noted that the dollar currently is strong, while it was plunging last October.
Canelo said that although the rise in the discount rate caught investors by surprise, it could be attributed to a need for a technical adjustment rather than to the beginning of a drive to raise interest rates dramatically. The discount rate is the interest the Fed charges financial institutions for short-term borrowings.
Andrew Riley, a market strategist at Yamaichi International, an investment firm in New York, said the current strength of the economy gives the Fed the opportunity to take some steps against inflation, “so they’re taking their advantage.” But, he said, “I believe the Fed does not want to precipitate a recession.” Nevertheless, he predicted that the Fed move will keep stock prices down in the short term as investors put their money instead into short-term debt securities that will be paying about 8%.
Despite the expectation of higher interest rates, the dollar fell in domestic trading Wednesday after closing higher overseas. Traders cited profit taking following the dollar’s surge on Tuesday, the decline in the U.S. stock and bond markets and unconfirmed rumors that the Group of Seven industrialized nations might be planning a meeting to stem the dollar’s recent rise.
As the stock market drop widened in the final hour of Wednesday’s session, the NYSE put into effect its “collar” that prohibits member firms from using the exchange’s computer facilities for program trading when the Dow rises or falls at least 50 points in one day. The exchange plans to abolish this safeguard, however, once the Securities and Exchange Commission approves substitute measures that it has proposed to limit market volatility.
Indexes Lower
On the NYSE, declining issues outnumbered advances by 7 to 1, with 1,401 down, 201 up and 378 unchanged. In addition to the Dow, broader market indexes were off. The NYSE’s composite index of all its listed common stocks dropped 2.43 to 148.23. Standard & Poor’s 500-stock composite index was down 4.59 at 261.90. The NASDAQ composite index for over-the-counter stocks tumbled 5.72 to 378.51.
Among the most actively traded blue chip stocks, American Telephone & Telegraph dropped 3/8 to close at 25 7/8, Exxon was off 3/8 to 45 1/2, International Business Machines lost 2 3/4 to 118 7/8, Dow Chemical was down 1 3/4 to 84 3/4 and General Electric was down 3/4 to 40 1/8.
Procter & Gamble, which reported quarterly earnings that were lower than some analysts’ expectations, fell 1 1/8 to 72 1/2.
Los Angeles-based Farmers Group climbed 5 3/4 to 63 1/2 as the most active issue in the over-the-counter market, with 2.96 million shares changing hands. The company said it would consider a sweetened takeover bid of $72 a share from Batus Inc.
In London, share prices tumbled in nervous trading Wednesday on the London Stock Exchange as the market was shaken by declines on the New York and Tokyo markets and worries about interest rates.
The Financial Times-Stock Exchange 100-share index fell 22.7 points, or 1.2%, to 1,839.9. Volume was a moderate 442.2 million shares.
