Dow Up by 110 as Stocks Rebound
A wave of buying swept Wall Street on Monday after Friday’s plunge, pushing the Dow Jones industrial average up more than 100 points and allaying concerns about a 1987-style market crash.
The blue-chip Dow index soared 110.55 points to 5,581.00, recouping nearly two-thirds of Friday’s 171.24-point tumble, as long-term interest rates declined somewhat from six-month highs.
But many analysts warned that the increasingly volatile U.S. stock market remains vulnerable to a further pullback, especially if new signs of economic strength drive interest rates higher soon.
What’s more, analysts said long-term interest rates, including mortgage rates, are unlikely to slide much more, as recession fears continue to evaporate.
Friday’s market rout had been triggered by an unexpectedly strong U.S. employment report that sent bond yields rocketing in the biggest one-day rate surge since 1990.
On Monday, however, the same good economic news that had contributed to stocks’ Friday slide helped lure buyers back into the market, especially to industrial stocks that would have the most to gain from a healthier economy.
On the floor of the New York Stock Exchange on Monday, trader Michael LaBranche scoffed at Friday’s stampede to sell, which, analysts said, was almost exclusively driven by short-term-oriented institutional investors.
“The fact that people have jobs is good for the economy,” he said. “People seem to lose sight of that.”
Individual investors, whose record investment in mutual funds has been largely responsible for stocks’ 5 1/2-year-old bull market, seemed mostly unfazed by the markets’ Friday trauma.
Major mutual fund companies reported modest increases in the number of customer phone calls they received and no excessive fund redemptions on the part of individuals.
In fact, few experts had expected much selling on the part of mutual fund investors, who have been encouraged since the Oct. 19, 1987, stock market crash--when the Dow index plummeted 508 points, or 23%--to view sudden, large market declines as opportunities to buy stocks cheaper.
The “buy on dips” mentality has become pervasive in the 1990s, analysts noted, because the stock market in this decade has continually recovered quickly from shocks. “People think that when it goes down, the faster you get in the more money you’re going to make,” said Rao Chalasani, investment strategist at the brokerage Everen Securities in Chicago.
At San Francisco-based brokerage Charles Schwab, one of the nation’s largest that deals with small investors, spokesman Hugo Quackenbush said trading activity Monday was 15% above the recent daily average and that “there were more buys than sells.”
T. Rowe Price Associates, a Baltimore-based mutual fund, said it experienced redemptions from some of its more aggressive stock funds in the morning, “then we saw some buying in the afternoon,” a spokeswoman said.
Of course, Friday’s market decline, which amounted to a 3% loss for the Dow index, was hardly comparable to the disastrous Friday session of Oct. 16, 1987, when the Dow plunged 4.6% amid a slumping dollar, soaring interest rates and other bearish signals, setting the stage for the following Monday’s market crash.
Nonetheless this time around, Wall Street still breathed a collective sigh of relief on Monday afternoon as buyers returned. But some wary analysts said the market remains vulnerable to more profit-taking, especially after the heady gains of the past 14 months.
In Orange County, The Times’ stock index of 111 companies showed winners outnumbering losers by almost 2-to-1. Even so, most of the gains were tiny, and the overall index rose just 1 point for the day, to 137.6, after falling 3.7 points Friday.
Locally, Seal Beach-based Rockwell International Corp. had the biggest dollar increase, making up nearly all of the ground it lost Friday, by climbing $2.50 to close at $58.625. PacifiCare Health Systems in Cypress and Costa Mesa computer-products maker QLogic Corp., two of the biggest losers Friday, gained very slightly.
The biggest loser was First American Financial Corp. of Santa Ana. Shares of the provider of real estate information services fell $2, the same amount it gained Friday, to close at $30.
Imperial Credit Mortgage Holdings Inc. in Newport Beach, which went public in November at $13 a share, was one of the few Orange County companies whose stock dropped for the second straight day. Shares of Imperial skidded $1.063 Monday, to $23.
Because interest rates rose so sharply Friday, “I think a lot of professionals thought we’d have a couple of days of downside moves” in stocks, said Tom Gallagher, a trader at brokerage Oppenheimer & Co. in New York.
Although Monday saw buyers quickly return, Gallagher said he views the increasingly large daily swings in the Dow and other stock indexes as worrisome. “I think the volatility in the market is a warning sign,” he said.
The stage was set for Monday’s rally as long-term interest rates, such as on Treasury bonds, began to ease in the late morning after rocketing on Friday.
Bond traders had pushed rates up dramatically Friday on fears that the February employment report--which showed that the economy added 705,000 jobs last month, double the number expected--was a sign that U.S. business activity was resurging.
A fast-growing economy could potentially lead to a tighter credit policy by the Federal Reserve Board or to higher inflation. Either development could be extremely negative for financial markets.
More important, until Friday, many bond market investors had expected the Fed to continue cutting short-term interest rates to keep the economy out of recession. As hopes for additional Fed cuts evaporated in the wake of the employment report, many bond investors bailed out, sending yields soaring.
The 30-year Treasury-bond yield, a benchmark for other long-term interest rates such as mortgage rates, zoomed to a six-month high of 6.72% on Friday from 6.46% on Thursday.
On Monday morning, bond yields continued to rise initially, pushing the 30-year T-bond yield as high as 6.77%. But by late morning, buyers returned to the bond market and by the close of trading the T-bond yield was at 6.63%.
“I think people began to reflect, and see that chances are really high that the February employment number is going to be revised lower,” said Scott Grannis, economist at Western Asset Management in Pasadena.
Many economists insist that the employment number was a fluke, and that the U.S. economy remains on a moderate growth track that could still allow for more Fed rate cuts. “I don’t believe that the economy’s fundamentals can change so dramatically” in one month, Grannis said.
Even so, many Wall Streeters were reluctant to read too much into Monday’s decline in bond yields. Shorter-term yields, they noted, did not fall as much as the 30-year T-bond yield fell.
And some of the buying in the bond market as well as in the stock market came from traders covering “short” positions. Short-traders borrow securities and sell them, expecting their prices to decline. If they had bet correctly ahead of Friday’s plunge, some traders would have been buying securities in the open market on Monday to replace their borrowed securities and close out their positions.
Without new reductions in short-term rates by the Fed, longer-term interest rates might not be able to decline much more from current levels, some analysts warned. “I think yields are fair at this point,” given the economy, said Bob Auwaerter, a bond fund manager at the Vanguard Group mutual fund firm in Valley Forge, Pa. That could mean that mortgage rates, in particular, will remain high after jumping on Friday with bond yields.
As for the stock market, some money managers said that investors must weigh the chances for faster-growing corporate earnings in a stronger economy against the possibility of higher interest rates.
For the broader market, much will depend on whether individual investors continue to pour money into stock mutual funds. For now, Wall Street trusts that nothing has happened to the economy, interest rates or the stock market to alter investors’ long-term bullishness.
Even before the day’s market trend became apparent Monday, one floor broker on the New York Stock Exchange said he doubted that a rout was in store.
Noting the huge inflows of money into stock mutual funds in January and February--which left many fund managers with cash they still haven’t invested--the floor broker confidently said the fund managers “have got to put that money to work, and they’ve got to put it to work here.”
Times staff writer Scot J. Paltrow in New York contributed to this story.
* BUYING OPPORTUNITY: Cyclical stocks led rally. D1
