Rising Rates Send Dow Down 36

Market Overview

- The stock market took a spill in heavy trading, faced with a sudden rise in interest rates as bond traders responded warily to new signs of a strengthening economy.

- Bond yields shot up across the board, in a dramatic reversal of the rally that had pulled interest rates lower in recent weeks. The 30-year Treasury bond yield jumped to 7.44% from 7.35%.

Today’s government report on December employment could provide another challenge for the markets, traders warned.

Stocks

Stocks were enjoying a decent day until late in the session, when traders suddenly began to dump bonds, sending interest rates up.

The Dow Jones industrial average was off just 3 points at 3 p.m. EST, before a flurry of sell orders hit the market. By the close the Dow was off 36.20 points to 3,268.96 for its sharpest decline since it lost 39.45 points last Oct. 9.

The selloff in blue chips sideswiped smaller stocks, which have been leading the market in recent months. The NASDAQ composite index lost 3.64 points to 678.21.

Declining issues topped winners by about 8 to 5 on the New York Stock Exchange, where volume soared to 303.15 million shares from Wednesday’s 288.53 million.

The bond market’s troubles mushroomed as traders focused on a Labor Department report showing that the number of Americans filing new claims for unemployment insurance fell by 40,000 during Christmas week to the lowest level in nearly four years.

That signal of a stronger economy revived long-dormant worries about higher interest rates down the road, analysts said.

But many bond traders said the market’s real problem was simply excess supply: Corporations have been rushing to issue new bonds at current low yields.

In the stock market, traders noted that many issues were ripe for profit taking after the powerful rally of recent months.

Today’s government report on December employment--the first major economic indicator for December--should be a good test of the resiliency of both the stock and bond rallies, traders said.

Among the market highlights:

- The Dow was hurt by Chevron, off 1 1/4 to 68 5/8; IBM, down 1 to 47; J. P. Morgan, off 1 1/4 to 64, and Woolworth, off 1 7/8 to 30 1/4.

Also, Alcoa dropped 2 to 70 5/8. A Morgan Stanley analyst cut his 1993 earnings estimate for Alcoa and other aluminum companies, citing weak pricing. The analyst now figures that Alcoa will earn $2.50 a share this year, down from a previous estimate of $4.

- Despite the Dow’s drop, many other industrial stocks ended higher on continued optimism about the economy. Among the gainers, Caterpillar rose 3/4 to 56 1/2, Ingersoll-Rand added 7/8 to 31, steel maker Nucor jumped 1 3/8 to 80 7/8, and Deere leaped 1 3/8 to 44 7/8.

- Transportation stocks also rocketed. UAL, parent of United Airlines, jumped 4 1/8 to 128 after the firm announced a major cost-cutting plan to boost profit.

Other transport winners included railroad CSX Corp., up 1 3/8 to 73 1/8; Federal Express, up 3/4 to 56 1/2, and AMR, parent of American Airlines, up 7/8 to 68 3/4.

- Technology stocks were mixed after their stunning rally of the last few weeks. Intel added 1 to 99 5/8 after trading as high as 103.

Among other techs, Motorola gained 1 1/8 to 109 1/4, Texas Instruments rose 1 to 54 1/2, and Cadence Design added 1 to 21, but Apple Computer lost 3/4 to 61, Compaq dropped 1 3/8 to 48 3/8, and Cisco Systems tumbled 2 1/8 to 80.

- Philip Morris rose 3/4 to 72 5/8, rebounding from a recent selloff prompted by government moves against “passive” cigarette smoke.

But other classic growth stocks, such as drug issues, continued to sink. Lilly fell 1 1/8 to 58 5/8, Pfizer lost 1 1/8 to 67 1/8, and Johnson & Johnson sank 1 1/4 to 45 5/8.

- Discount brokerage Charles Schwab soared 3 to 28 5/8 after the company told analysts that it expects to report record sales and earnings for 1992.

- BankAmerica slid 2 1/2 to 44. Kemper Securities cut the stock to a long-term buy from a strong buy after trimming earnings estimates.

Overseas, Frankfurt’s DAX index sank 13.88 points to 1,542.50. The German central bank, the Bundesbank, did not cut benchmark interest rates at a meeting Thursday, but did slightly scale back some less-important short-term rates.

In London, the Financial Times 100-share average lost 9.5 points to close at 2,816.5.

In Tokyo, the Nikkei average pushed above 17,000, but profit-taking brought it down to 16,780.98 by the close, off 1.90 points.

Credit

The rise in interest rates was across the board, though most pronounced in the long-term end of the market, which is where bonds have rallied most strongly in recent weeks.

Even short rates rose significantly, however: The yield on one-year Treasury bills jumped to 3.65% from 3.57% Tuesday.

The Labor Department report showing a large drop in unemployment claims was the second consecutive big decline and the 10th drop in 14 weeks. That was apparently too much for some bond owners: Each sign of an improving economy boosts the chances of higher interest rates.

But the huge new supply of corporate bonds may have hurt sentiment the most. More than $4.2 billion in new bonds were issued, as companies rushed to take advantage of low interest rates.

Some traders began to sell Treasury bonds as a hedge against potential losses in corporate bond purchases, said Elliott Platt, research director at Donaldson, Lufkin & Jenrette Securities Corp.

That caused the selling to cascade. “We blew out some pretty significant (technical) support levels,” said one trader.

If the recent bond rally is to stay intact, investors will have to respond favorably to bonds after today’s December unemployment report--even if it shows a stronger economy, traders say.

The federal funds rate, the interest on overnight loans between banks, was quoted at 3.18%, down from 3.75% Wednesday.

Other Markets

The dollar finished higher against most key currencies, strengthened by further evidence of a growing American economy and more U.S.-Iraq war rhetoric.

The dollar rose to 1.637 German marks in New York, up from 1.634 Wednesday. It also closed at 125.15 Japanese yen, unchanged.

Traders say the dollar could be helped further by the German Bundesbank’s slight easing of some money-market rates on Thursday.

Elsewhere, energy futures ended mostly lower on the New York Merc, with light, sweet crude oil for February dropping 9 cents to $18.95 a barrel.

On New York’s Commodity Exchange, gold for February delivery fell $1.10 to $328.70 an ounce, and March silver fell 4 cents to $3.67.