FINANCIAL MARKETS : Traders Pause to Evaluate Impact of Rate Hike by Fed
Blue chip stocks closed lower and bond yields rose Wednesday as investors pulled back to assess the impact of the Federal Reserve Board’s decision to aggressively boost short-term interest rates.
Smaller-company stocks performed better than the broader market, rallying amid investor belief that the issues might have a better chance than larger shares in a slow-growth environment. The Nasdaq composite index jumped 7.15 points to 742.66.
The Dow Jones industrial average, however, fell 8.09 points to 3,776.48 on the New York Stock Exchange, where volume totaled 312.84 million, up from 304.47 million Tuesday.
In the broader market, advancing issues outnumbered decliners by about 11 to 9 on the NYSE. In its fifth interest rate increase of the year, the central bank raised the federal funds rate to a 2 1/2-year high of 4.75% from 4.25%, where it had been since May. It also said it raised the discount rate to 4.0% from 3.5%.
Long-term bond yields ended moderately higher, rising in late trading after falling earlier in the day. The market decline eroded earlier speculation that a bull market had been aroused by the Fed’s action.
“It remains to be seen whether investors will now put cash to work in light of the Fed’s aggressive move to raise interest rates,” said Kathleen Camilli, chief economist at Maria Fiorini Ramirez Inc.
The yields on the Treasury’s main 30-year bond rose to 7.40% from 7.36% on Tuesday. Its price, which moves in the opposite direction, fell 13/32 point, or $4.06 per $1,000 in face value.
On Tuesday, the central bank’s credit tightening was seen as an aggressive move against inflation. On Wednesday, however, investors worried that higher rates could choke the economy, said Lawrence Rice, chief market strategist at Josephthal Lyon & Ross.
“People are sitting back and re-evaluating the impact of higher interest rates on the economic outlook for the next six months to a year,” Rice said. “Growth is likely to slow and corporate profits could suffer.”
Still, he said, that sentiment was balanced by significant relief that the Fed’s much-anticipated move was at least out of the way and that another is not likely anytime soon. Michael Metz, chief strategist at Oppenheimer & Co., said consumer non-durable stocks such as food and drug issues performed better. That was partly a reaction to continued takeover rumors in those sectors. But it was also tied to a belief that if the Fed’s rate increase proves to be a drag on the economy, these stocks would do better than so-called cyclical issues, Metz said.
Technology stocks also advanced sharply and with drug stocks helped pushed the Nasdaq and other smaller-company indexes sharply higher.
In a sluggish economy, investors often look to smaller, more agile companies, believing they can do well despite a slower economy, constantly reinventing themselves and delivering the biggest profit gains, analysts said.
Overseas, stocks rose in reaction to the Fed move. Prices closed in London with robust gains on a healthy turnover after British inflation data calmed fears of a near-term rise in domestic interest rates. The Financial Times-100 share average shot up 43.0 points to close at 3,190.3.
Frankfurt’s 30-share DAX average gained 19.15 points to finish at 2,162.29, while Tokyo’s 225-share Nikkei average ended up 38.20 points at 20,824.56.
Mexico’s Bolsa index finished up 5.05 points at 2,699.65.
Among the market highlights:
* CompUSA fell 1 1/2 to 7 3/8. The company said the company lost 74 cents a share in the fiscal fourth-quarter, compared to earnings of 20 cents a share in the same three months last year.
* American Cyanamid, which announced a $9.7-billion merger deal with American Home Products, gained 2 1/4 to 96 1/4. American Home rose 3/8 to 59 1/4.
* Elsewhere in the pharmaceuticals group, Eli Lilly rose 3 to 57 1/2. Smith Barney upgraded the drug group.
* Kmart gained 3/8 to 18. Gruntal & Co. upgraded the stock, saying Tuesday’s announcement that the company will sell its majority stake in three specialty divisions boosted the chances that Kmart’s dividend will not be cut.
* Technology issues peppered the Nasdaq actives list, with Intel gaining 2 3/16 to 63 3/4 and Microsoft rising 1 to 55 7/8. Dell Computer spurted 2 7/16 to 35 1/2.
The dollar declined against key currencies as the Treasury bond market’s rally faltered and expectations for a cut in official German interest rates faded.
The dollar closed in New York at 1.552 German marks, down from 1.559 on Tuesday. It was changing hands at 100.18 Japanese yen, down from 100.40.