Stocks Ignore Slowdown, Soar to Near Record
In a graphic illustration of the perverse nature of Wall Street, the stock market soared Friday in response to signs that the economy is slowing. The Dow Jones industrial average, a key indicator of market activity, rose 63.07 to close at 2,801.58--just 9 points shy of its all-time high.
“There seems to be something of a celebration going on,” said Hugh A. Johnson, chief investment officer at First Albany Corp. “The response of the markets has bordered on euphoria.”
The financial markets were reacting to economic figures released early in the day that indicated the economy has slowed dramatically.
Retail sales fell 0.6% in April, the sharpest decline in six months, the Commerce Department reported. And producer prices, which were expected to rise slightly, fell 0.3% following their 0.2% drop in March, according to the Labor Department. Both figures are key indicators of the future direction of inflation, which had been rising stubbornly since late last year.
The rising inflation rates had caused the Federal Reserve to tighten credit, which pushed interest rates higher and depressed the stock market early in the year. Higher interest rates make it more expensive for both consumers and companies to borrow, which slows spending and ultimately hurts corporate profits.
Friday’s reaction on Wall Street was made all the more dramatic because the recessionary figures were a surprise. Economists previously had expected both producer prices and retail sales to rise slightly during the month of April.
“This was World Series surprise time,” said Johnson. “The inflation numbers were much less than expected, the retail sales numbers were much less than expected, and the reaction of the markets was much greater than expected. This was a day of surprises.”
The bad economic news was taken as a clear signal that the Fed would not raise interest rates further. And additional signs of slowing might cause the agency to lower rates.
“This means the Fed is definitely not going to raise interest rates,” said Jack Kyser, chief economist for the Los Angeles Area Chamber of Commerce. “They are going to be content to let (rates) stay where they are, and then slowly drop over time.”
Meanwhile, the prospect of lower interest rates set off a rally in the bond market, with the price of the benchmark 30-year Treasury bond jumping by about $17.50 per $1,000 in face value.
There are also signs that figures on consumer prices, industrial production and housing starts, which are all expected out next week, will continue to show a weakening economy, said Mark M. Green, economist at Wells Fargo Bank in San Francisco.
Still, some investment experts were already saying Friday that the market reacted too much. The striking increases in stock and bond prices are probably not sustainable over time, said Richard Bernstein, manager of quantitative analysis at Merrill Lynch & Co. in New York.
“You saw a knee-jerk reaction today to the interest rate speculation,” Bernstein said. “The question is: Will it go on? Is it the begining of a major rally? We don’t think so.”
Although interest rates always play a key role in the health of the stock market, so do corporate profits. And the news on corporate profits continues to be negative. Merrill Lynch analysts have been lowering their earnings forecasts for the past several months and continue to do so, Bernstein said.
Overseas stock markets also posted strong results. Prices closed sharply higher Friday on the Tokyo Stock Exchange, with late buying encouraged by the strength of the bond market and the Japanese yen. The key Nikkei average of 225 issues, which gained 34.65 points Thursday, surged 531.88 points to close at 31,512.14.
In London, the Financial Times-Stock Exchange 100-share index finished up 18.9 points at 2,175.9 following the release of better-than-expected British inflation figures.
Volume on the New York Stock Exchange was 234.04 million shares, compared to 158.46 million on Thursday. Friday’s trading was the heaviest of the year, pushing up prices for a wide range of companies. Advancing issues outnumbered decliners by a 4-1 margin.
Prospects for lower interest rates particularly fueled financial stocks, with shares of the Federal National Mortgage Corp. rising $2 to $38.75; Citicorp climbed $1.125 to close at $23.875 and Great Western Financial Corp. closed up 87.5 cents at $18.125.
IBM rose $1.625, closing at $114. General Electric climbed 87.5 cents to close at $44.25 and Eastman Kodak jumped $1.50, closing at $40.625.
The Standard & Poor’s index of 500 stocks gained 8.18 points to 352.00. The NYSE composite index of all listed common stocks rose 4.10 to 192.24. The American Stock Exchange index rose 3.58 to 352.50, while the NASDAQ over the counter index climbed 4.90 to 438.10.
WHOLESALE PRICES FALL--Large declines in food and energy costs push prices down 0.3% in April. D1
