FINANCIAL MARKETS : Stocks Skid on Rate Worries; Dow Off 63.33
Stocks tumbled for a fourth straight day Tuesday as interest rates reached 12-month highs, and as new economic data suggested more pressure on inflation.
The Dow Jones industrial average slumped 63.33 points or 1.7% to 3,699.02, bringing its decline since March 18 to nearly 200 points.
The Dow now is 7% below its all-time high of 3,978.36 reached on Jan. 31.
In the bond market, the yield on 30-year Treasury bonds soared to 7.06% from Monday’s 6.97% close. Tuesday’s yield was the highest since last April 2.
Interest rates took another sharp upward turn after the Conference Board said Tuesday that its March consumer confidence index climbed to 86.7, the highest reading in more than 3 1/2 years and higher than economists had expected.
Investors fear that the economy’s robust growth--and consumers’ willingness to spend money--will lead to higher inflation, forcing the Federal Reserve Board to tighten credit again. The Fed has already raised short-term interest rates from 3% to 3.5% this year in two separate moves.
“The bond market is certainly suggesting” that the Fed may act again, said Joseph DeMarco, managing director for equity trading at HSBC Asset Management, a unit of Hongkong & Shanghai Bank with assets of $4.5 billion.
Meanwhile, in the stock market, investors are bailing out on worries about higher interest rates, and on fears that the ultimate outcome of higher rates will be another recession--even though most economists believe those concerns are overblown. Chemical, financial, utility, and auto stocks were among the day’s biggest losers.
As was the case on Monday, smaller stocks--the market’s recent leaders--plunged even more than blue chips. The Nasdaq composite index of mostly smaller issues sank 17.21 points, or 2.2%, to 755.29.
While trading volume on the New York Stock Exchange was active at 302 million shares, it didn’t suggest panic selling. Still, traders noted that winners swamped losers by 20 to 3 on the NYSE and by 20 to 7 on Nasdaq.
The Dow’s decline past the 50-point-loss level triggered the NYSE’s “uptick rule,” designed to curb computer-driven trading. But that rule does not halt individual stock sales, and the rush of selling accelerated late in the day.
As far as the stock market is concerned, “the tide is going down and all the boats are going down,” said Tom McManus, equity strategist at Morgan Stanley & Co.
The small number of rising stocks relative to the number declining “is giving a significant warning that further declines may be in store,” McManus said.
One obstacle the stock market faces is the “big change in liquidity that’s occurred” since early February, McManus said.
“For years, the Fed was pumping liquidity into the system. They’re now saying this fragile economic recovery is strong enough for us to start draining some liquidity out.”
Although stocks aren’t necessarily too expensive relative to earnings, the outlook may remain dim “until stocks find another source of liquidity,” McManus said.
Others were convinced that stocks will continue to fall unless interest rates stop rising, said Jeffrey Malet, chief investment officer of Pacific Century Advisers Inc.
“The stock market is a slave to interest rates, and rates are moving in the wrong direction,” Malet said.
Among Tuesday’s highlights:
* Industrial issues leading the market lower included Caterpillar, down 3 1/8 to 110 7/8; GM, off 1 3/8 to 56; 3M, down 1 5/8 to 98 3/8; and Dupont, down 2 3/8 to 54 1/2.
* Technology issues also tumbled. Microsoft shed 3 7/8 to 82 1/2, Lotus dropped 3 1/4 to 70, Intel slumped 2 3/8 to 66 1/4 and Newbridge Networks gave up 3 1/4 to 56 1/4.
* Many financial stocks dropped as interest rates surged. Wells Fargo lost 5 to 142 1/2, Chase Manhattan fell 3/4 to 32 1/2, Travelers tumbled 1 3/8 to 34 7/8 and Morgan Stanley was off 1 3/8 to 65 3/8.
* Among formerly high-flying young growth stocks, book retailer Barnes & Noble fell 1 3/8 to 24 1/2, fast-food chain Boston Chicken dropped 1 7/8 to 41 1/8 and Hollywood Park tumbled 2 5/8 to 19 3/4.
Overseas, Tokyo’s Nikkei index closed down 232.05 points at 19,709.74. Frankfurt’s DAX index ended at 2,168.35, up 6.93 points. In London, the FTSE-100 index eased 6.1 points to 3,123.4.
In Hong Kong, the Hang Seng index rallied, adding 283.11 points to 9,480.14.
And Mexico City’s Bolsa index gained 11.44 points to 2,457.59.
In other markets:
* Gold failed to respond to new inflation worries. Near-term futures fell on the New York Comex to $386.00 an ounce, off $2 an ounce silver closed at $5.64, off 3.7 cents.
* Crude oil futures rebounded on the New York Merc as bargain hunters followed perceptions that the market had overreacted Monday, when prices plunged on news that OPEC couldn’t agree on new production cuts. Light, sweet crude oil for May delivery ended 24 cents higher at $14.32 a barrel.
* Traders pushed the dollar down sharply against Japan’s yen, registering their disappointment over a Japanese plan to cut its trade deficit. The dollar fell to 103.10 yen in New York from 104.05 Monday.
