FINANCIAL MARKETS : Stocks’ Loss Is Biggest in 6 Months
Stocks suffered their biggest decline in six months Tuesday, as fears of higher interest rates again gripped Wall Street.
But in a day of wild market crosscurrents, bond yields closed only slightly above Monday’s levels, and the dollar strengthened against many European currencies even as it dove against the Japanese yen. Gold prices, meanwhile, surged to 13-month highs.
Sparked by the government’s report of a soaring U.S. trade deficit in July, the Dow Jones industrial average slumped 67.63 points, or 1.7%, to 3,869.09. It was the biggest one-day decline since the 72.27-point loss March 30.
In the broad market, losers swamped winners by 18 to 5 on the Big Board. Volume was heavy at 326 million shares.
The market’s tumble began early in the day, as bond yields shot up on word of the July trade deficit. Because the trade report showed a widening of the U.S. deficit with Japan, the dollar sank against the yen to a three-month low of 97.65, down from 98.53 on Monday.
That, in turn, prompted fears that the Federal Reserve Board will again raise short-term interest rates, this time to help the dollar.
Because the stock market had been counting on the Fed to lie low at least until November, the trade report resurrected investors’ latent concern about interest rates.
“The chances of the Fed tightening sooner rather than later are growing,” said Tom Kirkenmeier, analyst at Northern Trust.
Analysts also noted that the market was vulnerable to a selloff because share prices have rallied strongly since mid-August. The Dow, 3,755 on Aug. 19, jumped as high as 3,953 last week.
“We were ripe for some profit taking,” said Joe Loftus, trader at Lehman Bros. in New York.
Even so, the breadth of Tuesday’s decline took some Wall Streeters aback. While computerized program trading as usual was blamed for worsening the market’s fall--the Dow’s loss ballooned 30 points in the final hour--analysts said many stocks unaffected by programs also were dumped.
The Nasdaq composite index of mostly smaller stocks plunged 9.98 points, or 1.3%, to 766.74.
“That negative breadth does have us worried a bit,” said Alan Shaw, analyst at Smith Barney in New York.
Traders also were puzzled because stocks failed to rebound late in the day, as the bond market’s tone improved. The 30-year Treasury bond yield, which jumped from 7.75% on Monday to 7.82% early Tuesday, closed at 7.77% as buyers returned. Shorter-term yields also were up only slightly.
And while the dollar dropped versus the yen, it strengthened against the German mark and other key currencies.
Some analysts said stock investors may be fearful that the trade report’s news of strong imports but lower exports could be signaling that U.S. companies’ profits will be disappointing in the months ahead. Expectations of strong profit growth has helped support the stock market all year, in the face of higher interest rates.
Also, Wall Street is getting mixed signals from key stock indexes. While the Dow industrials have been hovering near all-time highs, the Dow transportation stock index on Tuesday plunged to a new 1994 low of 1,516.66, down 35.87 points. Because the transport business is sensitive to the economy’s swings, that index appears to be heralding economic weakness.
Among Tuesday’s highlights:
* The plunge in transport stocks was led by Federal Express, down 4 1/2 to 60; CSX, down 1 5/8 to 68 1/4; UAL, down 1 7/8 to 93 3/8, and Consolidated Freightways, off 1 to 23 1/8.
* Industrial stocks falling included DuPont, down 1 3/4 to 57 3/4; 3M, down 1 1/4 to 55 1/2; GE, off 1 to 49 1/2, and Scott Paper, off 1 7/8 to 62 3/8.
* Financial stocks reacted badly to higher interest rates. American Express dove 1 3/8 to 29 7/8, Federal National Mortgage sank 2 3/4 to 81 3/4, Morgan Stanley lost 2 to 63 1/4 and BankAmerica was off 1 1/8 to 46 1/2.
* Profit takers targeted retail issues. Sears tumbled 1 3/8 to 48 7/8, Nordstrom lost 2 1/2 to 42 3/4 and Dayton Hudson lost 2 5/8 to 76 7/8.
Also in the retail group, Burlington Coat Factory plunged 7 1/2 to 15 3/4 after reporting a quarterly loss, and Musicland Stores slumped 2 1/8 to 15 3/4 after warning about disappointing quarterly earnings.
* Among the few bright spots in the market, Magma Power rocketed 7 1/4 to 34 3/4 after getting a takeover bid from California Energy.
Also, Digital Equipment surged 1 5/8 to 27 7/8 after Cowen & Co. recommended the stock.
In other markets, October gold futures zoomed $3.60 to $394.10 on the Comex, a 13-month high, as some investors sought a safe haven. October silver leaped 20.3 cents to $5.63 an ounce.
Overseas, London’s FTSE-100 index fell 41.8 points to 3,037.3, in tandem with Wall Street. Frankfurt’s DAX index lost 17.80 points to 2,078.96, while Tokyo’s Nikkei rose 283.16 points to 19,837.27.
Mexico City’s Bolsa index added 6.45 points to 2,810.07.
