Wall Street Toughs Out a Roller-Coaster Day : Blue Chips Plummet, Then Regain Ground, as Bonds Recover
Stocks and bonds suffered deep selloffs early Wednesday as investor pessimism appeared to reach a crescendo, only to give way to a wave of buying that produced stunning comebacks in both markets by day’s end.
After five days of losses, the Dow industrial average was well on its way to a sixth losing session early Wednesday, falling more than 50 points in the first hour.
But a turnaround that began shortly thereafter built steam as the day wore on, and the Dow closed with a gain of 22.51 points at 3,831.74. The broad market, however, remained weak, though it too fought back from its lows.
In the bond market, yields on 30-year Treasury issues rocketed as high as 6.92% overseas before U.S. markets opened Wednesday, up from Tuesday’s close of 6.78%.
But in New York trading, the T-bond yield moved gradually lower throughout the day and finished at 6.77%. Shorter-term yields also eased.
Analysts said downbeat economic statistics released Wednesday helped calm the inflation jitters that have bedeviled markets in recent weeks, as investors have focused on the potential for rising prices in the increasingly robust economy.
But more important than the economic reports was the spreading feeling early Wednesday that both stock and bond markets were overdue for at least a temporary snap-back, analysts said. In Wall Street parlance, the bond market in particular “was very oversold,” said Philip Roth, analyst at Dean Witter Reynolds.
The 30-year T-bond yield has zoomed from a 21-year low of 5.79% last fall, and was 6.35% as recently as Feb. 4. That was when the Federal Reserve Board officially boosted short-term interest rates by 0.25 point--the Fed’s acknowledgment that the economy was growing fast enough to warrant restraining moves.
The stock market has plunged as interest rates have rocketed. At 3,831, the Dow is off 3.7% from its all-time high reached Jan. 31.
Many Wall Streeters in recent weeks have warned investors that the U.S. market is ripe for a classic drop, or “correction,” of 5% to 10%, as markets worldwide suffer profit taking and as stock prices adjust to the new reality of a strong economy and higher interest rates.
On Wednesday, well-known Lehman Bros. market guru Elaine Garzarelli said on CNBC-TV that the U.S. stocks could fall as much as 10% in the current setback. She had previously said the correction range would be 4% to 7%.
Meanwhile, Kevin Logan, economist at Swiss Bank Corp. in New York, said U.S. bond yields may finally have risen far enough to attract buyers, despite inflation concerns. As rates have surged in recent weeks, many potential buyers have remained frozen simply because of the severity of bonds’ selloff, Logan said.
Traders have blamed the sharp rise in bond yields on dumping of bonds by high-powered speculators, such as so-called hedge funds that operate worldwide. Those funds appeared blindsided by the Fed’s rate hike, causing them to jettison bonds here and abroad.
In turn, markets have been battered by fears that hedge funds’ heavy use of derivative securities, such as futures and options, could cause unexpected losses throughout the world financial system as the funds unwind their trades.
Those worries struck again Wednesday, with rumors that Bankers Trust of New York had suffered major losses in derivatives. Its shares were delayed opening. Once trading began the stock fell as low as 76 7/8, then closed at 78 1/2, off 2 1/4. The bank said only that “operations thus far for 1994 have been profitable.”
Some analysts warn that the markets’ jitters may continue for a while, and that stocks are vulnerable to deeper profit-taking even if interest rates stabilize.
On Wednesday, despite the Dow index’s rebound, most broad indexes closed lower. Also, losers outnumbered winners by nearly 2 to 1 on the New York Stock Exchange, although the margin had been 5 to 1 early in the day.
Further declines in many foreign stock markets had weighed on Wall Street at the opening Wednesday. In Tokyo, the Nikkei index dropped 471.85 points to 19,744.77 on renewed fears of a U.S.-Japan trade war.
In Frankfurt, the DAX index sank 46.72 points to 2,020.33, while London’s FTSE-100 index fell 20.5 points to 3,248.1.
In Mexico City, however, the Bolsa index rebounded with the Dow, rising 48.53 points to 2,562.68.
Among U.S. market highlights:
* Industrial issues caught bargain-hunters’ eyes, pulling the Dow up. Winners included GM, up 2 3/8 to 60 1/2; Caterpillar, up 3 1/8 to 112; Kodak, up 1 1/4 to 44 1/4, and Alcoa, up 2 to 76 1/2.
* Oil issues also rose, with Chevron up 2 1/8 to 87 1/4, Mobil up 1 5/8 to 80 and Exxon up 1 to 65 7/8.
* Some technology issues gained, including Motorola, up 2 5/8 to 106; Lotus, up 3 to 72 1/2, and Autodesk, up 1 5/8 to 59 3/8. But AST Research plunged 5 1/4 to 23 1/2 after it warned that revenue growth will slow in the near-term.
* On the downside, many financial issues remained weak. SunAmerica fell 7/8 to 34 1/2, Citicorp lost 3/4 to 39 5/8, First Chicago lost 1 1/4 to 47 and PaineWebber eased 1/2 to 26 1/8. But the Dow utility index managed to rally, adding 2.24 points to 211.64.
Other Markets
The dollar finished lower against most foreign currencies, but managed to recoup some losses triggered by the release of German money supply figures.
Foreign exchange traders said the dollar plummeted after Germany reported that its M3 money supply measure jumped 20.6% on an annualized basis in January compared to the average rate in the 1993 fourth quarter. The Bundesbank said the figure was distorted by special factors.
However, many investors took the number as a sign that German inflation could come roaring back.
Germany’s cautious central bank, anxious to choke off inflation, has lowered interest rates very slowly and had been expected to drop them again soon, but that may not happen now. A halt to interest rate cuts in Germany could support the German mark.
The dollar closed at 1.704 marks in New York, down from 1.708 Tuesday, after falling below the psychologically important level of 1.700. It also fell against the Japanese yen, closing at 104.15, down from 104.60 Tuesday.
Meanwhile, gold eased on the New York Comex to $377.80 an ounce, down 50 cents. Silver was up 0.3 cent to $5.28.
