Dow Drops 42.02 as Real Estate Fears Rout Bank Sector
The stock market took its sharpest drop in five weeks Monday as edginess about the stability of the real estate market led to a rout in the banking sector, which spilled over into the broader market.
The Dow Jones index of 30 industrials fell 42.02 to 2,697.53, for its biggest single-day loss since it dropped 47.34 points on Nov. 6.
Declining issues outnumbered advances by more than 7 to 2 in nationwide trading of New York Stock Exchange-listed stocks, with 361 up, 1,289 down and 362 unchanged.
The shares of many banks fell sharply after the Bank of New England, a large regional bank, said Friday that it would have a substantial loss this year because of bad real estate loans.
The announcement weakened other banking and financial issues on Monday amid fears that more banks could also suffer from delinquent real estate loans.
“The theme today is real estate. Virtually every money center bank, everything associated with real estate is getting clocked,” said Larry Wachtel, a vice president at Prudential-Bache Securities.
“When you have a bellwether group like the banks eroding, you have to conclude that the whole market is weak,” he said.
The Dow had been up as much as 10 points Monday morning on hopes that the Federal Reserve would ease credit to help boost the economy. The Fed’s key policy-making committee met Monday and will meet again today.
In the past couple of weeks, Wall Street has been devoting increased attention to the soft real estate market in many parts of the country, and the problems that real estate debt might pose should prices of properties lag for an extended period.
Some observers contend that the situation could become a primary contributing factor to a debt-induced business slump in 1990.
Analysts and traders also said that portfolio managers were getting rid of poor performers before the year’s end.
Bank of New England shares led the active list, down 1 1/2 at 7 1/2 on the heels of a 3 3/8-point drop Friday.
Among other mortgage and regional banking issues, Citytrust Bancorp fell 2 1/2 to 14 5/8, Bank of Boston dropped 7/8 to 16 1/4, Shawmut National was off 1 1/2 to 17 7/8, First Interstate Bancorp fell 4 3/8 to 43 1/8, Federal National Mortgage retreated 2 5/8 to 31 1/8, and Federal Home Loan Mortgage lost 5 7/8 to 61 7/8.
The money center bank group also came under selling pressure. Bankamerica dropped 2 1/8 to 23 7/8, Chemical Banking fell 2 to 29 1/4, Manufacturers Hanover dipped 1 7/8 to 31 3/8, and Chase Manhattan lost 1 1/8 to 31 7/8.
Losers among the blue chip industrials included International Business Machines, down 1 3/8 at 93 5/8; American Telephone & Telegraph, down 3/4 at 46; USX, down 3/4 at 34 1/8, and McDonald’s, down 3/8 at 33 7/8.
Marriott dropped 1 to 33 5/8. The company announced a restructuring program, including a planned move out of the fast-food and family restaurant business, but also estimated lower fourth-quarter earnings.
Big Board volume declined to 184.79 million shares, down from Friday’s 240.39 million.
The Nikkei average of 225 selected issues, which added 90.34 points last Friday, soared 315.14 points to close at 38,586.18.
The gain was the fourth record high close in a row for the Nikkei and its sixth consecutive advance.
In London, stocks rose in moderate trading, recovering partly from losses in the previous session. The Financial Times 100-share index ended the day 13.8 points higher at 2,358.5.
CREDIT
Stock Selloff Pushes Bond Prices Higher Bond prices were mostly higher in reaction to a stock market’s selloff and continued hopes of lower interest rates.
The government’s key 30-year bond gained 5/32 point, or $1.56 cents per $1,000 in face amount. Its yield, which falls when prices rise, declined to 7.83% from 7.85% late Friday.
Bond prices began rising in tandem with the afternoon stock market drop, analysts said.
“Any time the (stock) market goes down this much we see some kind of reaction,” said Kevin Flanagan, a money market economist with Dean Witter Reynolds Inc. “(When) people see stocks going down, they usually put a little money in Treasuries.”
Long-term fixed-income investments such as bonds generally are viewed as a safe haven during times of economic uncertainty or a shaky stock market.
Also Monday, the Federal Open Market Committee, the panel of Federal Reserve Board members and regional bank presidents, met to map monetary strategy.
The federal funds rate, the interest on overnight loans between banks, was quoted at 8.50%, unchanged from late Friday.
CURRENCY
Dollar Mixed Amid Listless Trading The dollar ended mixed Monday against key foreign currencies in quiet, directionless trading.
Gold prices declined.
On the Commodity Exchange in New York, gold bullion for current delivery settled at $411.80 an ounce, down $2.10 from Friday. Republic National Bank in New York quoted a late bid for gold at $412.75 an ounce, off $1.75.
Currency dealers said market activity was light because many traders already have started to close out their books for the calendar year.
But Earl I. Johnson, a trader with Harris Trust & Co. in Chicago, said, “The dollar is vulnerable on the downside,” as evidence of a weaker economy continues to surface.
In Tokyo, where trading ends before Europe’s business day begins, the dollar closed at 144.22 Japanese yen, down from 144.30 yen Friday. It traded at 144.10 yen in London and at 143.725 yen in New York, down from 144.15 yen Friday.
The dollar was mixed against the British pound. Sterling fetched $1.6020 in London, down from $1.6055 late Friday, and $1.60685 in New York, up from $1.6030.
COMMODITIES
Cold Weather Heats Up Fuel Oil Futures Heating oil futures soared on the New York Mercantile Exchange as forecasts for more brutally cold weather attracted new buyers to a market that has been climbing with barely a pause for five weeks.
On other commodity markets, livestock futures were mixed, and grains and soybeans were mostly lower.
Heating oil futures settled 0.49 cent to 4.24 cents higher, with the contract for delivery in January up 4.24 at 74.66 cents a gallon, a four-year high.
Unleaded gasoline futures finished 1.3 to 1.74 cents higher, with January at 54.51 cents a gallon; crude oil futures settled 3 cents to $1.12 higher, with January at $22.22 a barrel, the highest level since last April.
With sub-zero temperature readings boosting domestic demand for heating oil, the entire energy complex has become a weather market. The cold snap that descended on the nation’s midsection last week is expected to continue into this weekend, bringing unseasonably frigid temperatures to most of the United States east of the Rockies.
