Recession Fears Push Stocks Lower as Bond Yields Fall : Markets: News of a sharp rise in the unemployment rate has some investors running scared.
Fear of another recession overshadowed the Federal Reserve’s interest-rate cut on Thursday, sending stock and bond investors scurrying in opposite directions.
Buyers rushed into long-term bonds, sending the yield on the benchmark 30-year Treasury issue down to 7.63% from 7.74% Wednesday. The new yield was the lowest since January.
Meanwhile, the Dow Jones industrial average dropped 23.81 points to 3,330.29, after rallying 35.58 points on Wednesday.
The nominal catalyst in both markets was the Federal Reserve’s half-point cut in short-term interest rates. But analysts said investors reacted more to the underlying cause of the Fed’s hasty action: a dismal June employment report that suggested that the U.S. economy could fall back into recession.
The stock market had expected the employment report to be weak, but the sharp rise in unemployment clearly frightened some investors.
Industrial stocks that had run up this year on hopes of economic recovery were hit hard. Big losers included Ford, off 2 1/4 to 43 1/8; Alcoa, down 2 1/2 to 75 1/8; 3M Co., off 2 1/2 to 96; Goodyear, which lost 2 3/8 to 67 1/2, and Cummins Engine, off 1 3/4 to 66 1/4.
Nonetheless, many analysts said investors would have reacted much more violently if they truly believed that a new recession is imminent. Rising stocks still beat losers 926 to 839 on the New York Stock Exchange, on heavy volume of 220.2 million shares.
“I think we’re still going to have an economic recovery, and we’re going to have a recovery in corporate profits, but it’s just going to be slower than people expected,” said William Dudley, financial markets economist at Goldman, Sachs & Co.
Gene Seagle, veteran market analyst with brokerage Gruntal & Co., said history shows that it is usually a mistake to bet against the stock market when interest rates are falling. “As the Fed goes, so goes the market,” Seagle contended. He believes that the Dow will rally to 3,650 by Election Day.
Investors will have the weekend to ruminate on the latest interest rate and economic developments: Financial markets will be closed today for the July 4 holiday.
For many people, the decision to stay in stocks or buy more--on the hope of still-elusive economic strength--will be purely a function of the latest decline in short-term interest rates, courtesy of the Fed.
The discount rate on three-month Treasury bills plunged 0.31 points to 3.23% on Thursday, the lowest in more than 20 years. Banks and S&Ls; will soon drop yields on CDs accordingly.
Already Thursday, Glendale Federal Bank said it cut yields on $10,000 six-month CDs to 3.80% from 3.95%.
Robert Heady, publisher of Bank Rate Monitor newsletter in Florida, predicted “Roosevelt-era rates” on many bank accounts.
The average yield on one-year CDs nationwide is likely to fall to 3.8% soon, from 4.03% now, he said. Since CDs were deregulated in the early 1980s, the one-year yield has never been below 4%.
Many savers have fled low-paying accounts at banks and S&Ls; over the last 18 months, seeking higher returns in riskier investments such as stocks and long-term bonds. Now, Heady said, “the people who’ve held off (pulling their CDs) are going to have to take a second look.”
Indeed, Treasury bonds and bond mutual funds in particular may rake in billions of fresh dollars as savers face a new round of rate cuts at their local bank or S&L.;
Even if the stock market gets only a small amount of that cash, analysts say stocks could benefit in another way: An increasing flow of cash into long-term bonds could drive long-term interest rates much lower. That would have a much greater positive effect on the economy than the drop in short-term rates, because long-term borrowing costs reflect an economy’s true cost of capital.
Dudley at Goldman Sachs believes that Thursday’s bond rally could herald a dramatic change in investors’ mind-set: With the economy still weak, it’s dawning on many investors that “we’ve really gotten rid of inflation in a major way,” he said. If they accept that as a long-term trend, bond yields could fall sharply, he said, ultimately helping the economy.
Among Thursday’s highlights:
* Financial stocks rocketed on news of the Fed’s interest rate cut, because lower rates boost bank and S&L; profit margins. BankAmerica gained 1 1/2 to 46 1/4, Wells Fargo rose 1 3/8 to 75 1/2, Countrywide Credit surged 2 7/8 to 38 7/8, and Federal National Mortgage added 2 to 64 3/8.
* Some home builders’ stocks also rose on hopes that lower mortgage rates will spur home buying. Kaufman & Broad gained 5/8 to 15 1/2, Centex leaped 1 7/8 to 46 7/8, and PHM was up 1 3/8 to 20 1/8.
* Technology stocks followed industrial issues lower on economic worries. FileNet plunged 3 3/4 to 19 1/2, Apple lost 2 3/4 to 46 1/4, Hewlett-Packard slumped 3 3/8 to 66 7/8 and Vitesse Semiconductor collapsed 4 3/4 to 4 3/4. Also, a new wave of smaller tech companies forecast lower quarterly earnings, among them Easel, down 13 1/2 to 8 1/4, and Network General, down 10 to 9 1/4.
In overseas markets, Tokyo’s Nikkei index gained 432.56 points to 16,757.63. In London, the Financial Times-100 index lost 20 points to 2,473.9. In Frankfurt, the DAX index rose 12.35 points to 1,768.61.
Currency
The dollar tumbled against most major currencies after the Fed slashed interest rates.
Speculation about the Fed’s intentions had already driven the dollar lower in recent weeks. Lower interest rates make dollar-denominated securities less valuable to foreign investors, decreasing their need for U.S. currency.
In New York, the dollar slumped to 1.508 German marks, down from 1.523 Wednesday. It also fell to 124.40 Japanese yen from 125.38.
Commodities
Energy futures advanced on the New York Merc, extending gains chalked up Wednesday after a report showed a sharp drawdown in U.S. crude oil stocks last week.
Light, sweet crude for August rose 24 cents to $22.10 a barrel.
On New York’s Comex, July gold rose $2.20 to $346.50 an ounce, reacting to the flight from the dollar. July silver was flat at $4.03.
MAIN STORY, A1
