Investors, Spooked by Inflation Worries, Flee Stocks
Stocks tumbled with bond prices Thursday as investors ran for cover on the eve of a pivotal employment report, spooked by mounting evidence of a surging economy that could produce higher inflation.
Thus ended a string of 10 straight days of record-high closes for the smaller-stock-dominated Nasdaq composite and Russell 2,000 indexes. Both fell sharply Thursday--the Nasdaq by 21.33 points to 1,178.33, and the Russell 2,000 by 4.34 points to 345.94.
The Dow Jones industrial average plunged 76.95 points to 5,498.27; it recovered slightly from a loss of almost 100 points late in the session.
Broader indicators also tumbled as long-term interest rates jumped above 7% in the bond market. The interest rate on the 30-year Treasury bond--a benchmark for many loans--had not closed above 7% in almost a year.
Investors, fearing the monthly employment report would prompt a sell-off--as happened with the two previous monthly employment reports--secured their profits on smaller-company stocks, which have been outperforming those of blue-chip companies for weeks on expectations they will benefit most from an improving economy.
Declining issues outnumbered advancers by nearly 4 to 1 on the New York Stock Exchange, where volume was heavy at 441.06 million shares, above Wednesday’s pace.
The NYSE composite index fell 5.32 points to 346.21. The Standard & Poor’s 500-stock index fell 11.20 points to 643.38. At the American Stock Exchange, the market value index fell 4.81 points from Wednesday’s record to 588.97.
Bond prices started tumbling after the Commerce Department reported that the gross domestic product--the nation’s total output of goods and services--sprang back in the first three months of the year, growing at an annual rate of 2.8%.
The GDP’s growth--far above expectations--was powered by renewed consumer spending, particularly for computer products, and business investment. The report said the GDP growth rate would have hit 3% without January’s blizzard and the partial federal government shutdown.
“Economic indicators have been coming in better than expected. That has traders expecting a surprise on the upside in the payroll figures,” said Bob Dickey, a technical analyst for Dain Bosworth in Minneapolis. “They fear the economy is growing too quickly, which it is.”
The last two monthly employment reports showed bigger-than-expected jumps in the numbers of new jobs. The financial markets were hit both times as investors worried that the greater numbers of jobs indicated too much spending power, thus increasing inflation and cutting into the value of fixed-income investments such as bonds.
The stock market steadied after an early drop Thursday, but another wave of selling in the bond market pushed stocks into a steeper slide.
“Profit taking was broad across the market. The downward pressure on bonds was just too much for the equity market to resist,” said A. Marshall Acuff Jr., market strategist at Smith Barney Inc., noting that stocks resisted that pressure for weeks with the help of strong first-quarter-profit reports.
Among market highlights:
* Bank and other financial stocks fell amid concern that higher interest rates could hurt their profits. NationsBank fell 2 1/2 to 77 1/2 and Wells Fargo lost 7 to 237 3/4.
* Among widely held issues, AT&T; fell 1 1/8 to 59 3/8, Merck fell 1 7/8 to 58 3/4 and Wal-Mart fell 5/8 to 23 5/8.
* Several technology bellwethers managed to buck the downward trend. IBM was unchanged at 107 7/8, and Intel rose 1/8 to 68 and Sun Microsystems added 1 3/8 to 57.
* Hotel franchiser HFS gained 3 3/8 at 55 after confirming that it is acquiring privately held Coldwell Banker, one of the nation’s largest residential real-estate brokerages.
* Minnesota Mining & Manufacturing lost 1/2 to 65 3/8 after reporting lower earnings.
* Computer Sciences fell 2 5/8 to 72 3/8. Although its fiscal fourth-quarter profit was better than expected, revenue from commercial contracts was lower than some had expected.
Overseas, worries over the strength of the U.S. economy and that there might be a rise in U.S. interest rates sparked a sharp sell-off in London, sending the FTSE-100 below the psychologically important 3,800 level. The FTSE-100 ended 29.6 points lower at 3,776.4.
Shares in Tokyo ended lower, harmed by profit taking and arbitrage-related selling ahead of Japan’s long weekend and the release of U.S. jobs data today. The 225-share Nikkei average finished down 152.63 points at 21,662.38.
The stock and bond sell-off pulled the dollar lower against the Japanese yen and other major currencies. In late New York trading, the dollar stood at 104.35 yen, down from 105.32 yen on Wednesday, and at 1.5283 German marks, down from 1.5363.
Elsewhere in the bond market, yields on three-month Treasury bills rose to 5.10% as the discount rose 0.02 percentage point to 4.98%. Six-month yields rose to 5.34% as the discount rose 0.08 point to 5.14%. One-year yields rose to 5.69% as the discount rose 0.12 point to 5.39%.
Yield is the interest the bond pays by maturity; the discount is the interest at which it is sold.
In the commodities markets, wheat prices plunged despite more bad news about the drought-plagued Kansas wheat crop. A rumor that cash deliveries would occur set off a stampede to sell contracts at the Chicago Board of Trade.
The May wheat contract, which has seen no deliveries against it since first notice day on Tuesday, hit a high of $6.90 early and then plunged to close at $6.20 per bushel, down 56 cents and 14% since reaching a high at $7.17 on Monday.
