FINANCIAL MARKETS : S&P; Yield Hits Record Low as Stocks Rocket
A powerful bond market rally sent share prices to record highs again Wednesday, but stocks’ gains have now pushed dividend yields to record lows--a historically bearish indicator.
On Wall Street, fresh signs that the U.S. economy is slowing sent the yield on 30-year Treasury bonds slumping from 7.31% on Tuesday to 7.23% on Wednesday, the lowest level since June, 1994.
Shorter-term bond yields, which had risen last week on worries that the economy might be reaccelerating, also dove. The two-year Treasury note yield tumbled to 6.40% from 6.52% on Tuesday.
The bond market rally wasn’t slowed by the Treasury’s announcement Wednesday that it will auction $30 billion in new three- and 10-year notes next week at its quarterly “refunding.” The news was as expected.
In the stock market, the Dow industrials surged 44.27 points, or 1%, to a new high of 4,373.15 as bond yields dropped. Broader market indexes also leaped, and winners topped losers by a convincing 15 to 8 on the New York Stock Exchange in heavy trading.
That catalyst for Wednesday’s action was the government’s report that leading economic indicators declined in March at the steepest pace in two years.
“Everybody has been expecting (an economic) slowdown, and now we’re in the teeth of it,” said William Harnisch, chief investment officer of Forstmann-Leff Associates Inc., which manages about $3 billion.
Instead of fearing that slower growth might turn into recession, however, Wall Street is betting that the economy will push along at a moderate pace--allowing corporate profits to continue advancing while interest rates and inflation remain low.
Hence, stocks are zooming. “We’re in the stampede phase,” said A.G. Edwards technical research director Alfred Goldman in St. Louis.
He and other analysts note that stellar first-quarter earnings reports from many major U.S. companies have convinced investors that profits can rise significantly even in a weaker economy.
Wednesday’s rally pulled the market higher across the board. However, smaller stocks continued to lag blue chips, which have led this year’s stunning advance. The Russell 2,000 index of smaller stocks rose 0.94 point to 266.84, a 0.4% rise compared with the blue-chip Dow’s 1% gain.
Although bond yields didn’t begin to slide until midday, stocks rose powerfully from the outset. The Dow was up 31 points by 1 p.m. EDT and closed with a burst of buying after two minor bouts of profit taking.
Despite the euphoric rally, however, some analysts urged caution. By one classic measure of market valuation--the dividend yield of the Standard & Poor’s 500 index--U.S. stocks now appear dangerously high-priced.
The S&P; dividend yield fell to a record low 2.62% by Wednesday’s close. That is based on the S&P; index at 520.48 and the indicated annual dividend of the index at $13.68, according to Arnold Kaufman, editor of S&P;’s Outlook newsletter.
The previous record low for the S&P; yield was 2.64% in August, 1987--at the peak of the 1980s bull market. Stocks crashed in October of that year.
Many analysts say S&P; dividend yields of less than 3% have historically signaled bull market tops. However, bullish Wall Streeters argue that cash dividends aren’t as important an indicator for the market today, because instead of paying out more cash, many companies are buying back shares, seeking to boost shareholders’ returns by driving stock prices higher.
Among Wednesdays’s market highlights:
* The Dow was pulled up by classic growth issues whose earnings often hold up well in times of moderate economic growth. Winners included Philip Morris, up 2 3/4 to 72 5/8; Procter & Gamble, up 1 1/8 to 71, and McDonald’s, up 1 1/8 to 36 1/4.
Also, Eastman Kodak soared 3 to 60 1/2 after it told analysts that its strong first-quarter earnings gain wasn’t an anomaly. A Morgan Stanley analyst predicted the stock should hit 100 in a few years.
* Airline shares rallied again, as fears of rising fuel prices and an air fare war sparked by Continental Airlines abated. American Airlines parent AMR soared 2 3/8 to 68 3/4, United Airlines parent UAL rose 1 5/8 to 118 3/4 and Delta was up 7/8 at 64 3/8.
* Drug stocks were also broadly higher. Merck rose 1 to 44, Lilly jumped 1 5/8 to 76 1/2 and Pfizer was up 1 7/8 to 87 1/2.
* Tech stocks, recent market leaders, advanced again. IBM jumped 1 3/8 to 94 1/4, Intel rocketed 3 3/8 to 107 3/8, Hewlett-Packard gained 3 1/8 to 67 1/2 and Texas Instruments soared 5 1/8 to 110 1/8.
* On the downside, some heavy-industrial issues lost ground. Fluor fell 1 3/8 to 51 5/8 after it was downgraded by Smith Barney.
Overseas, Frankfurt’s DAX index eased 7.24 points to 2,028.68, while London’s FTSE-100 average gained 14.4 points to 3,262.6.
Japan’s financial markets were closed for national holidays and will reopen Monday.
Market Roundup, D6
