Discount Rate Increase Jolts Stock Market; Dow Falls 43
The Federal Reserve Board’s hike in the discount rate jarred the stock market Friday, slicing 43.92 points from the Dow Jones industrial average and closing out the market’s worst week since August.
Selling gathered momentum through the session as some investors fretted that the half-point rise in the discount rate wouldn’t be sufficient to halt inflation and others worried that future rate increases might finally choke off the long economic expansion.
It was the market’s second sharp fall in three sessions, leaving the Dow off 79.28 points, or about 3.4%, for the week, closing at 2,245.54. The Dow lost 42.50 points on Wednesday.
The market’s recent slide has eaten up a good chunk of the gains that stocks achieved in January. The widely watched Standard & Poor’s 500-stock index had gained about 5.6% in value from Jan. 1 through the trading Thursday, but it lost about 2% of that in Friday’s slide, said James D. Wright, chief investment officer at Banc One Asset Management in Columbus, Ohio.
“It was steady pounding, across the board,” he said.
Still, a number of analysts said Friday’s tumble could have been worse, considering the week’s difficult economic news. And they saw much bullish sentiment remaining in the market.
They cited the general strength of corporate earnings and the momentum of a national economy that has been virtually unaffected by the interest rate increases.
“This is the sort of knee-jerk reaction the market frequently has to interest rate moves, but we think it may come out of it strongly,” Wright said.
Edward J. Nicoski, market analyst with the Piper, Jaffray & Hopwood brokerage in Minneapolis, said his firm has recently advised clients to put up to one-quarter of their portfolios in cash. Only last month, Piper Jaffray was recommending that clients put 100% of their assets in the stock market, he said.
Nicoski said the firm is concerned that the market has hit a “violent air pocket” because of worries about inflation and how well the Fed will be able to handle it as it simultaneously struggles to remedy the thrift crisis.
“This air pocket may last longer than some people anticipated,” he said. “But in a few weeks, we may be out of it and heading back north.”
Eugene J. Peroni, market analyst with Janney Montgomery Scott in Philadelphia, said he expected that the Dow would fall to about 2,100 from the post-crash high of 2,347.14 that it reached Feb. 7. But after a weak period that may last through March, the bull market will re-emerge, he predicted.
Peroni pointed out that recently there has been a change in how the market has reacted to interest rate hikes. The market absorbed news of rate hikes with “reckless abandon” last year as it recovered from the October, 1987, crash and was buoyed by strong corporate earnings.
Honeymoon May Be Over
“The market’s now reacting more violently to rate rises than it has in some time,” he said.
Investors had long expected a rise in the discount rate, which was lifted to 7% from 6.5%, and initially Friday there was little reaction to the Fed’s announcement. But the selling increased with computer-assisted trading, which continued fitfully through the session.
Overall, volume was moderate, with 160.68 million shares traded on the New York Stock Exchange, compared to 150.37 million Thursday. Declining issues outnumbered gainers by a 7-to-2 margin.
The S&P; 500 index fell 4.92 to 287.13, as the NYSE composite index lost 2.37 to 161.72. The average share price was off 49 cents on the New York Stock Exchange.
Peroni said the Senate Armed Service Committee’s negative vote on John Tower’s nomination to be defense secretary might have been a “secondary factor” in the day’s trading. “A lot of people in the market have focused on their hopes for this Administration, and it looks like the honeymoon may be ending.”
Housing Issues Off
The stock selloff was felt across most sectors. Among the blue chips, International Business Machines fell 2 1/4 to 121 1/8, American Telephone & Telegraph lost 3/4 to 29 3/4, Eastman Kodak skidded 1 1/2 to 46 5/8 and Minnesota Mining & Manufacturing slid 1 5/8 to 65.
Bethlehem Steel gave up 1 1/8 to 25, Merck lost 1 1/8 to 62 3/8 and Du Pont fell 2 1/8 to 95.
Companies in the housing and auto industries, always hurt in rate rises, were hit hard. General Motors was off 2 1/2 to 84 1/4, Ford tumbled 1 3/8 to 51 3/4 and Chrysler gave up 1/2 to 25 3/4.
U.S. Home fell 1/4 to 1 7/8, Kaufman & Broad Home slid 1/4 to 15 3/4 and Centex gave up 3/8 to 27 7/8.
Among the gainers, Emhart jumped 7 1/8 to 39 7/8, substantially above the $35 a share offered by Topper L.P., a partnership consisting of the Fisher real estate family and oil heir Gordon Getty.
In the airline industry, UAL fell 2 3/4 to 125 1/4, AMR lost 1 1/8 to 59 7/8, Southwest Airlines eased 3/8 to 23 3/8 and Delta was unchanged at 56 3/4.
The airline sector’s big gainer was NWA, which has been the subject of takeover speculation. Its shares rose 3 5/8 to 72 3/8.
Among issues on the American Stock Exchange, New World Entertainment was up 1/2 to 5 1/2 on news that it will be acquired by Pathe Entertainment.
California Energy dropped 3 7/8 to 16 7/8. The Kidder, Peabody & Co. investment firm issued a recommendation to sell the stock, saying there were “numerous claims” on the revenue from its main geothermal project.
In London, the Financial Times 100-share index ended the day 2.9 points, or 0.1%, higher at 2,019.5. The Tokyo Stock Exchange was closed Friday for the funeral of Emperor Hirohito.
