Dow Drops 19.54 Over Slow-Growth Signals
Buffeted by conflicting sentiments about the economy, stock prices finished lower Tuesday in active, choppy trading.
Wall Street started the day higher, adding to the strong gains of recent sessions, but later retreated.
The Dow Jones index of 30 industrials, up 13.09 points in the first half-hour of trading, closed 19.54 points lower at 2,641.12.
Declining issues outnumbered advances by about 8 to 7 in nationwide trading of New York Stock Exchange-listed stocks, with 808 issues down, 729 up and 477 unchanged.
Volume on the floor of the Big Board totaled 225.28 million shares, up sharply from 166.65 million in Monday’s session.
The National Assn. of Purchasing Management said its index of the economy slumped to 46% in July, its lowest reading since an identical one in January, 1983. Also pointing toward slow growth was a Commerce Department report on a decline in construction spending.
The reports rallied the bond market but pushed the Dow index lower, and the blue chip indicator swung widely up and down through the rest of the trading session.
Stock investors are nervous that the market may have risen too quickly and is due for a downturn. A Monday rally carried the Dow to within 60 points of its record high, 2,722.42 on Aug. 25, 1987.
Traders have been taking confidence from signs of declining interest rates. But the economic slowdown that helps the inflation-sensitive bond market is not so good for the stock market because slow growth could hurt corporate profits.
“It’s that balancing act,” said Larry Wachtel, an analyst for Prudential-Bache Securities Inc. “Of course we know the economy has been softening, but bad news has been good news up to now.”
Analysts said the market shrugged off a statement by Federal Reserve Chairman Alan Greenspan that the Fed moved to lower interest rates for a third time last week as part of its effort to avert a recession.
Greenspan “was confirming what the bond market already knew,” said Michael Metz, an analyst with Oppenheimer & Co.
Among the volume leaders on the NYSE, American Telephone & Telegraph was down 3/4 at 39 7/8, Upjohn dropped 1 3/8 to 34 5/8 and Citicorp lost 1/2 at 33 3/8. Eastman Kodak, which reported lower earnings, fell 1 1/4 to 47.
Texaco was up 5/8 at 53 3/4.
Nationwide, consolidated volume in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 265.19 million shares.
The NYSE’s composite index of all its listed common stocks fell 1.03 to 191.38.
Standard & Poor’s industrial index fell 3.48 to 392.20, and S&P;’s 500-stock composite index declined 2.33 to 343.75.
The NASDAQ composite index for the over-the-counter market was down 0.55 at 453.29. At the American Stock Exchange, the market value index slipped 0.75 to 375.81.
The Wilshire index of 5,000 equities closed at 3,360.241, down 17.162, or 0.51%, from the previous day.
Large blocks of 10,000 or more shares traded on the NYSE totaled 4,522, compared to 3,393 yesterday.
In London, stock prices weakened in thin volume. The 100-share Financial Times/Stock Exchange index dropped 4.7 points to close at 2,292.3.
Stock prices on the Tokyo Stock Exchange eased slightly Tuesday as investors cashed in following Monday’s sharp gains. Trading was moderately active.
The key Nikkei average of 225 selected issues, which surged 248.24 points to a new landmark on Monday, eased 55.41 points to 34,898.46.
Credit
Signs of economic weakness sent bond prices up sharply Tuesday, although half the day’s gains were erased in a late slide.
Even after the erosion, the Treasury’s benchmark 30-year bond rose 15/16 point, or $9.38 per $1,000 in face value, surpassing its gains of Monday.
Higher bond prices mean lower interest rates. The decline in rates has been engineered by the Federal Reserve, the nation’s central bank, to encourage borrowing and revive the economy.
The 30-year bond’s yield, which falls when the price goes up, dropped to 7.84% from 7.92% late Monday. The yield had dropped below 8% for the first time since April, 1987, on Friday.
The federal funds rate, the interest on overnight loans between banks, traded at 8.70%, down from 8.75% late Monday.
The main influence on the bond market was a report by the National Assn. of Purchasing Management that its index of economic activity dropped for the third straight month to the lowest level since 1983.
On top of that, the Commerce Department said a persistent housing slump pushed construction spending to the lowest level in eight months.
A slow economy is welcomed by bond investors, who fear that rapid growth will trigger high inflation and sap value from their fixed-income holdings.
At one point the Treasury’s long bond climbed as much as 1 7/8 point. It lost ground in response to weakness in the dollar and nervousness that the rally was overextended and due for a decline.
The day’s gains were concentrated in long-term bonds. Short-term Treasury bills were unchanged or weaker.
In the secondary market for Treasury bonds, prices of short-term governments rose about 1/16 point, intermediate maturities rose about 1/8 point and long-term issues rose slightly less than 1 point, reported Telerate Inc., the financial information service.
The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.
Yields on three-month Treasury bills rose to 7.93% as the discount rose 4 basis points from the level at auction Monday to 7.68%. Yields on six-month bills rose to 7.73% as the discount rose 1 basis point from the level at auction Monday to 7.35%. Yields on one-year bills fell to 7.61% as the discount fell 1 basis points to 7.11%.
Currency
The dollar came under intense pressure Tuesday, falling sharply on a growing belief that interest rates will have to decline in order to avoid a recession.
Lower interest rates make the dollar and dollar-based investments less attractive to international investors.
The dollar closed at 1.8505 West German marks, down from Monday’s closing of 1.8650. It also fell to 135.90 Japanese yen from 136.95 on Monday.
Commodities
Grain futures prices closed mostly higher in a technical rebound Tuesday on the Chicago Board of Trade, but soybeans for August delivery plunged to a new 16 1/2-month low, reflecting a rise in supplies from South America.
In addition to the increased movement of newly harvested soybeans from Argentina and Brazil, soybean speculators saw an important technical support swept away Monday when August soybeans crashed below $6.25 a bushel.
Monday’s 24 1/2-cent plunge in the August contract prompted selling in an attempt among some traders to depress the market further, to the next support level of $6 a bushel, said William Biedermann, director of research with Allendale Inc., a futures brokerage based in Crystal Lake, Ill.
At the close, wheat was 2 1/2 cents to 6 1/2 cents higher, with the contract for delivery in September at $3.87 1/4 a bushel; corn was 1/4 cent lower to 4 1/2 cents higher, with September at $2.22 1/4 a bushel; oats were 1 1/2 cents to 3 1/2 cents higher, with September at $1.33 a bushel; soybeans were 10 1/2 cents lower to 8 cents higher, with August at $6.14 a bushel, the lowest settlement of a nearby soybean contract since March 16, 1988.
