Dow Drops 2.72 After First Cheering Tax Idea
Stocks closed lower today after profit taking erased a sharp rally of more than 30 points in the Dow Jones industrial average that was built on President Bush’s decision to yield on the issue of raising taxes to cut the budget deficit.
The Dow Jones 30-share average closed down 2.72 at 2,842.33. Decliners and gainers were about evenly matched.
Volume was light at 140 million shares.
Analysts said stocks turned lower on profit taking and lingering worries over upcoming second-quarter earnings results.
The Dow Jones industrial average, up more than 22 points in the first half hour of trading, fell back by early afternoon as the weight of Bush’s remark wore off.
Prices for bonds and stocks increased on the news f Bush’s comment, reflecting investor optimism that the deficit could decline, easing pressure on interest rates by lowering the amount of money the federal government must borrow.
Analysts also said the stock market was adjusting after losses Friday and Monday. The market had slipped in the last two sessions over concern about higher interest rates and weaker corporate earnings.
Government bond prices surged and interest rates pulled back this morning after President Bush’s announcement of possible willingness to consider tax hikes to reduce the budget deficit.
The rally helped some widely watched long-term bonds regain much of the ground lost Monday in a slump sparked by concerns about an abundance of new issues coming to market soon.
The credit market’s bellwether issue, the 30-year Treasury bond, jumped 19/32 point, or nearly $6.25 per $1,000 face amount, almost making up for Monday’s loss of 7/8 point. Its yield retreated to 8.50% from 8.55% late Monday.
Renewed buying in the bond market followed Bush’s comments about including “tax revenue increases” in any deficit-reduction package the White House works out with congressional negotiators.
Trading in the secondary market for Treasury securities picked up from Monday’s sluggish pace. An anxious mood prevailed in the previous session amid concerns that prices will come under pressure during a series of bill, note and bond sales.
Those auctions got under way Monday with the Treasury’s sale of $17.2 billion in three-month and six-month bills.
The sales continue this week as the Treasury sells $11.25 billion of two-year notes today, $8.25 billion of four-year notes Wednesday and $10.52 billion of one-year bills Thursday.
The government is expected next Tuesday to announce its plans for a seven-year note auction, and the agency responsible for the thrift industry bailout will announce its borrowing plans the same day.
In late morning trading, prices of short-term governments rose 3/32 point to 9/32 point, intermediate maturities advanced 7/32 point to 5/8 point.
