Interest Rate Worries Batter Stocks, Bonds : Markets: Dow loses 36.89 points as Treasury bond yields soar to 6.17%, while gold gains. Profit taking also slams overseas stocks.
U.S. share prices tumbled for a second day Thursday as long-term bond yields surged, fueling widespread fear that stocks are headed for a long-awaited “correction.”
Overseas, where interest rates are still falling, profit takers also slammed key stock markets, many of which had surged to record highs in October.
On Wall Street, the Dow industrials sank 36.89 points to 3,624.98, after Wednesday’s 35.77-point decline.
In the broad market, falling stocks swamped rising issues by more than 3 to 1 on the New York Stock Exchange, as trading continued heavy at 323 million shares. Smaller stocks also suffered heavy new losses Thursday, after diving Wednesday.
Though a two-day market decline isn’t unusual, analysts say the backdrop for this selloff is troubling and suggests that a deeper--if temporary--setback lies ahead. “We probably are in a correction (in prices), and we’re vulnerable to a drop of 10% or more,” said Greg Nie, technical analyst at Kemper Securities in Chicago.
Among the worrisome developments in world markets:
* In the United States, many stock investors are having trouble coping with the idea that interest rates may have bottomed after three years of decline. Though a modest rate rise shouldn’t dramatically hurt the growing economy or corporate profits, “it’s a major change in psychology” and one that could undermine stocks temporarily, says Steven Resnick, analyst at Cowen & Co.
On Thursday, the yield on the 30-year Treasury bond--the benchmark long-term interest rate--jumped to 6.17% from 6.10% on new signs of economic strength. The yield has surged from a 20-year low of 5.79% in mid-October.
Moreover, the bond market isn’t reacting as most market players had expected. Because the government has cut back on new sales of long-term bonds, many analysts expected long-term yields to remain under control, even if short-term interest rates rose with a healthier economy.
Instead, the dumping of 30-year bonds has been intense. “It’s taking everyone by surprise,” said William Sullivan, economist at Dean Witter Reynolds in New York.
In contrast, short-term rates appear to have stabilized recently.
* In Japan, stocks have been under heavy pressure in recent days, after investors failed to warmly embrace the share offering from rail giant JR East--a new stock that had been expected to revitalize the Tokyo market.
In addition, investors are dumping stocks that won’t be included in a new Nikkei share index that is expected to become the market’s primary indicator. The current Nikkei index tumbled 431.45 points Thursday, and at midday today in Tokyo the Nikkei was off another 295.22 points to 18,654.57--the lowest since March 31.
* Worldwide, profit takers suddenly appear eager to take some money out of stocks, following the euphoria that characterized many markets in October. In the red-hot Hong Kong market, for example, the Hang Seng index plunged a combined 4.5% on Wednesday and Thursday and early today lost another 265.55 points to 8,939.33.
Some analysts believe that a powerful new depressant on all world markets is fear of renewed protectionism in global trade relationships. Those worries have been fueled by growing talk that the North American Free Trade Agreement will fail in Congress.
David Shulman, investment strategist at Salomon Bros. in New York, argues that “a ‘no’ to NAFTA is a ‘yes’ to inefficiency” in business and that investors will lower their expectations for markets worldwide if NAFTA fails.
Oddly, however, Mexico City stocks haven’t reflected those concerns. The Bolsa index added 11.93 points to 2,011.98 on Thursday, despite Wall Street’s selloff.
Some analysts believe the selling afflicting the U.S. market can be blamed more on the calendar than any other factor.
With the year almost over, and with most investors sitting on substantial paper stock and bond profits, the urge to lock in profits--or to refrain from investing any more--may be guiding many big market players, experts say.
“I think a lot of people now are trying to figure out how to preserve their capital,” said Howard Gleicher, investment strategist at Palley-Needelman Asset Management in Newport Beach.
Indeed, a key test for stocks and bonds in the days ahead will be whether individual investors step up their mutual fund purchases or back off. If fund investors opt to join the profit taking, the odds will increase that stock and bond markets will sink further, at least for the near term.
Among Thursday’s highlights:
* Utility and financial stocks continued under heavy pressure amid rising interest rates. The Dow utility index plunged 5.28 points, or 2.3%, to 226.40. It has now fallen 11.7% from its September peak.
Among financial stocks, First Interstate lost 2 1/8 to 54 1/8, Wells Fargo fell 2 1/2 to 105 7/8 and Merrill Lynch sank 1 1/2 to 89 3/8.
* Tech stocks again were slammed. Intel fell 1 7/8 to 59, Hewlett-Packard dropped 2 to 72 1/2 and Lotus Development slumped 3 1/8 to 44 1/4.
* On the upside, fears that faster economic growth will boost inflation rallied gold stocks. ASA gained 1 7/8 to 48, American Barrick jumped 3/4 to 27 1/2 and Homestake Mining added 7/8 to 19 7/8.
* Some retail stocks rose on better than expected October sales figures. Sears gained 3/8 to 57 5/8 after reporting same-store sales up 12.7%. Wal-Mart added 1/8 to 27 3/4.
In other markets:
* Near-term gold futures surged $4.40 to $372.40 an ounce on New York’s Comex on rumors that global investor George Soros was changing his investment mix, possibly shifting into gold from bonds.
Silver followed gold, adding 7.5 cents to $4.38.
* Oil prices fell slightly, taking a break from the broad price swings of the past week. Light, sweet crude oil for December settled at $17.40 per barrel, down 9 cents, at the New York Merc.
Market Roundup, D6
Profit Takers Swarm
Major world stock markets have succumbed to heavy profit taking over the past two days, after most hit record highs in October.
Two-day Loss Thurs. Market/Index point chg. pct. close Hong Kong/Hang Seng -438.03 -4.5% 9,204.88 U.S./Nasdaq composite -28.40 -3.6% 757.26 Japan/Nikkei 225 -431.45 -2.2% 18,949.79 U.S./Dow industrials -72.66 -2.0% 3,624.98 Germany/DAX -32.97 -1.6% 2,062.61 Britain/FTSE-100 -15.10 -0.5% 3,149.00
Source: Reuters
