Dow Off 70 but Broad Market Sees Small Loss
The Dow Jones industrials slumped nearly 1.3% Wednesday as component IBM plunged, but the broad market recorded only a minor drop, halting a three-day rally.
Meanwhile, bond yields edged up and grain prices rebounded somewhat on Chicago futures markets from Tuesday’s slide.
On Wall Street IBM’s warning about lower profit margins ahead caused general unease and helped push many technology issues down. But earnings reports from some other major industrial firms, including Ford Motor, were well-received by investors.
Still, the Dow index tumbled 70.09 points to 5,549.93, with IBM’s 10 1/4-point drop, to 105 1/4, accounting for about half the index’s loss.
Among broader indexes, the New York Stock Exchange composite slipped 0.5% as losers topped winners by 13 to 10.
But the Russell 2,000 index of smaller stocks eased just 0.2% from Tuesday’s record high. And the American Stock Exchange market value index, mainly made up of smaller companies, rose 0.2% to a record 580.38.
Investors in recent weeks have favored small-company stocks over blue chips. Smaller companies are perceived to be more focused on the domestic economy than multinational companies, so the resilience of the U.S. economy this year is benefiting smaller issues.
Also, the dollar’s surprising strength this year is viewed as hurtful to multinational companies because it can devalue their overseas earnings.
Indeed, IBM cited the dollar’s strength as one reason it is worried about earnings growth as the year progresses.
“It’s inevitable that the dollar strengthens this year against major currencies,” said Tom Carpenter, chief economist of ASB Capital Management Inc. “It’s a trend that will continue, and large cap companies may significantly underperform.”
The dollar stalled on Wednesday as some traders took profits from the recent rally. The buck dipped to 1.5062 German marks in New York from 1.5097 Tuesday. It was up modestly against the Japanese yen, to 108.20.
Within the Dow index, other multinational shares under pressure included Caterpillar, off 2 3/4 to 67 3/4 one day after issuing a disappointing first-quarter earnings report; and Coca-Cola, which lost 1 1/4 to 80 1/8 despite reporting a 12% first-quarter profit gain.
In the bond market yields rose for a second day amid continuing worries that the U.S. and global economies are stronger than many analysts believe. The 30-year Treasury bond yield edged up to 6.81% from 6.79% on Tuesday. The two-year T-note yield rose to 5.99% from 5.93%, and now is the highest since April 11.
The recent surge in bond yields “is more understandable in terms of financial liquidity,” said Charles Blood, director of financial markets analysis at Brown Brothers Harriman & Co. in New York.
“The economy’s getting better and likely to stay better. When that happens, the demand for credit goes up,” he said. Assuming the Federal Reserve Board doesn’t increase the supply of credit by lowering short-term interest rates, that means market rates will climb with the greater demand for credit, he said.
The stock market has been counting on strong corporate earnings growth to offset the negative influence of higher interest rates. So far, many companies are reporting first-quarter results ahead of expectations, but analysts note that the majority of companies have yet to reort.
“Corporate earnings seem to be running 7% to 10% ahead of estimates,” said Alan Ackerman, senior vice president at Fahnestock & Co. in New York. “But the rest of earnings tale is yet to be told.”
Among Wednesday’s highlights:
* Stocks rising on earnings news included Ford, up 1 1/4 to 36 5/8; Illinois Tool Works, up 2 to 65 7/8; Occidental Petroleum, up 7/8 to 26 5/8; Rockwell, up 1/4 to 56 3/4; Textron, up 2 3/4 to 87 7/8; and AMR, the parent of American Airlines, up 1 1/2 to 92 7/8.
* Issues declining on earnings reports included Colgate-Palmolive, down 1 1/8 to 75 7/8, and CyberOptics, down 5 9/16 to 20 3/16.
* Among tech issues following IBM lower, Computer Associates sank 2 1/8 to 69 3/8, Digital Equipment lost 1 3/8 to 52 1/8 and Seagate dropped 1 7/8 to 59 1/8.
* Oil stocks also were weak in profit-taking. Mobil fell 1 1/8 to 115, Unocal lost 1/2 to 33 1/4 and Phillips dropped 3/4 to 39 5/8.
* In the telecom sector, Nynex rose 2 1/4 to 53 3/8 and Bell Atlantic gained 1 5/8 to 61 7/8 after The Wall Street Journal reported that the two Baby Bells have revived talks that could result in a merger. Combined, the two would be a communications company second in size only to AT&T.;
In foreign trading, Mexico’s bull market resumed, with the Bolsa index climbing 33.69 points, or 1%, to a record 3,234.62.
In U.S. commodity trading, wheat prices rose as concern about the condition of the United States’ winter wheat crop helped to reignite the market’s bull trend after Tuesday’s setback.
The rally came as farmers of both hard and soft red winter wheat across the U.S. were facing decisions about whether to abandon crops. Department of Agriculture chief meteorologist Albert Peterlin said the winter wheat crop had gotten off to its worst start since the 1989 drought year.
Speculative selling and profit-taking had sparked a sharp setback earlier in the week. But on Wednesday the May wheat futures contract on the Chicago Board of Trade rose 4 1/4 cents to $5.71 a bushel. Corn and oat prices also rebounded.
