Bond Yield Jump Triggers Sell-Off
Stock prices fell Tuesday on selling triggered by a dramatic jump in long-term interest rates. Investors were rattled by comments by Federal Reserve Board Chairman Alan Greenspan and concern over the outcome of the New Hampshire presidential primary.
The 30-year bond yield soared to 6.40% from 6.24% on Friday, the highest closing yield since Oct. 12. The Dow Jones industrial average fell 44.79 points, or 0.8%, to close at 5,458.53 after rebounding partially from a late afternoon loss of more than 60 points. Last week the Dow set a record high of 5,601.23.
Brett Discher, vice president of equity trading at Dain Bosworth, said part of Greenspan’s comments were a surprise. “Everyone assumed the economy was slowing. He says it isn’t. So now everyone is wringing their hands and worrying about interest rates not being lowered,” he said.
Greenspan told Congress that the economy is on track for sustained growth, adding that weakness was temporary. This fueled speculation that the central bank may not continue to cut interest rates as aggressively as many on Wall Street had hoped.
But some experts thought investors were looking for excuses to sell after the market’s recent rapid-fire climb in record territory.
“The market started going down before Fed Chairman Alan Greenspan opened his mouth,” said Michael Metz, chief investment strategist at Oppenheimer & Co.
“But the expectations of a Fed ease next month were too optimistic. My feeling is the markets were looking for a reason to sell off,” he said.
Despite the tumble in the stock and bond markets, gold fell as well, possibly because as the reduced likelihood of further interest rate cuts decreased the metal’s allure for investors.
April gold closed $6.40 an ounce lower at $401.10 an ounce. During trading in New York, the price fell under $400 for the first time since Jan. 18, dipping as low as $399.20 an ounce.
A blistering New Year’s rally lifted gold to a six-year high near $418 on Feb. 2 from a sleepy trading band below $400 where it had languished for two years. But the Chinese New Year celebrations may put a damper on Asian buying, a key component in the rally.
In the U.S. stock market, Tuesday’s retreat was spread across a wide range of industries, with many of the big winners over the last few weeks giving ground on profit-taking.
Declining issues swamped advances 1,957 to 511 on active volume of 395.0 million shares on the New York Stock Exchange.
The jockeying among Republican contenders for the chance to oppose President Clinton has raised some concerns for Wall Street, analysts said.
“As long as the debate persists of Buchanan becoming a candidate, it’s not a positive political backdrop for stocks and bonds and U.S. financial assets,” said Tom Carpenter, chief economist of ASB Capital Management.
“Bonds were more squeamish than stocks. There’s no sense of panic,” said Alice Hook, a trader at McDonald & Co.
She said that the drop in the blue-chip Dow index was comparatively small considering what the market has achieved over the last several months. At its peak last Tuesday, the Dow had gained some 400 points since the start of the year.
“People are trying to determine how far we’ll go down for a reentry point. People would probably be more nervous if we fell more than 100 points,” Hook said.
What should investors do now?
“There’s nothing like cash at a moment like this,” said Metz. “I have a feeling we’ve seen the high in the trading range finally for an extended time.”
Nervousness over slower 1996 corporate earnings growth also weighed on stocks.
“Most of us know earnings will slow. But can you look across the valley? The first and second quarters will be stinko, but by the third quarter it’ll look better,” said William LeFevre, senior market analyst at Ehrenkrantz King Nussbaum.
Among market highlights:
* Technology companies posted gains as some portfolio managers snapped up the shares on the belief that the sector will still outperform the broader market.
Among the gainers, Micron rose 7/8 to 36 5/8, IBM added 1 to 119 1/8 and Intel was up 5/16 to 57 7/8.
* Interest-rate sensitive stocks fell. Wells Fargo lost 4 3/8 to 245 3/4, First Interstate shed 2 3/4 to 161 1/4, Fannie Mae lost 7/8 to 32 7/8 and Freddie Mac was down 2 3/4 to 83 7/8.
* Davidson & Associates and Sierra On-Line soared after CUC International said it agreed to acquire both companies in separate deals together worth $2.2 billion.
Davidson added 6 to 24 1/2, Sierra rose 7 3/8 to 34 1/2 and CUC was down 6 3/8 at 31 1/8.
* Unilever fell 5 3/8 to 139 1/8 after posting a 3% drop in profits for 1995 and warning of a continued low-growth environment in Europe this year.
Overseas, Japan’s Nikkei stock average fell 0.3%, Frankfurt’s DAX fell 0.7%, and London’s FTSE-100 fell 0.8%.
Oil prices soared Tuesday as refiners jumped back into a sellers market after delaying purchases while Iraq negotiated with the United Nations over a humanitarian sale of oil.
“Refiners, who had delayed their pricing because of the possibility of a U.N.-Iraq oil deal, left their buying until the last minute,” said Michael Hiley of Smith Barney.
“It was mostly related to the expiry of the March contract today, and I’m not sure it implies any long-term change in the supply/demand balance,” Hiley said.
March crude oil, which expired at the close of trading, jumped $1.89 to $21.05, a three-year closing high at the New York Mercantile Exchange.
March gasoline soared 1.94 cents to 57.71 cents a gallon.
But warm weather forecasts for the Eastern half of the country pushed down March heating oil 0.48 cent to 56.39 cents a gallon, and March natural gas fell 12 cents to $2.321 per million British thermal units.
