Stocks Stage Broad Decline on Economic Reports
Stocks took a nasty fall Thursday as soaring bond yields sent some investors running for cover on concerns about the economy’s strength.
The Dow Jones industrial average slumped 76.95 points, or 1.4%, to 5,498.27, though it recovered from a loss of almost 100 points late in the session.
Smaller stocks, which have ignored nearly all potentially negative news in recent weeks and climbed continually to record highs, finally succumbed to profit taking as investors braced for today’s April employment report.
The Nasdaq composite index of mostly smaller stocks sank 21.33 points, or 1.8%, to 1,178.33, after 10 straight winning sessions.
Other small-stock indexes also dropped sharply. The Russell 2,000 index fell 4.34 points, or 1.2%, to 345.94.
Trading wasn’t exceptionally heavy, but losers topped winners by 24 to 15 on Nasdaq and by 20 to 6 on the Big Board.
“Profit taking was broad across the market. The downward pressure on [bond prices] was just too much for the equity market to resist,” said A. Marshall Acuff Jr., strategist at Smith Barney Inc.
For weeks, strong first-quarter corporate earnings reports have allowed the stock market, particularly smaller issues, to advance even as bond yields have remained near their highest levels since last summer.
The good news in recent economic data--that the U.S. economy remains resilient--has buttressed stocks while spooking bond owners, who fear that stronger growth will lead to ever higher interest rates and higher inflation.
On Thursday, the government’s surprisingly robust report on first-quarter gross domestic product growth was again more than the bond market could handle. The 30-year Treasury bond yield soared to 7.05% from 6.90% on Wednesday, reaching its highest level in nearly a year.
Among shorter-term securities, the yield on the two-year Treasury note shot up to 6.20% from 6.01% Wednesday. The six-month T-bill yield rose to 5.36% from 5.28%.
The GDP report set the stage for today’s April employment report, one of the first indicators of economic activity in the second quarter. If stronger than expected, it could cause another rout in bonds and plunge in stocks, as investors assume the economy’s rebound will soon prompt the Federal Reserve Board to begin officially tightening credit, analysts warned.
The last two monthly employment reports showed bigger-than-expected jumps in the number of new jobs, sending bond yields up and stocks down.
Stocks, however, snapped back both times. The question now is whether bond yields are reaching levels that create too formidable an obstacle for the bull market to surmount. As yields go up, after all, they create greater competition for stocks and also raise companies’ cost of doing business, potentially depressing earnings.
Among Thursday’s highlights:
* Bank and other financial stocks fell amid concern that higher interest rates could hurt their profits. NationsBank sank 2 1/2 to 77 1/2, Wells Fargo lost 7 to 237 3/4 and Citicorp slumped 1 7/8 to 77. Among brokerages, Merrill Lynch dropped 2 3/4 to 57 7/8.
* Among widely held issues, Boeing plunged 3 1/8 to 77 1/2, AT&T; fell 1 1/8 to 59 3/8, Merck fell 1 7/8 to 58 3/4 and Wal-Mart was off 5/8 to 23 5/8.
Also, 3M lost 1/2 to 65 3/8 after reporting lower earnings.
* Several technology bellwethers managed to buck the downward trend. IBM was unchanged at 107 7/8, Intel rose 1/8 to 68 and Sun Microsystems added 1 3/8 to 57.
But many other tech issues were hit. Microsoft fell 3 1/2 to 111 5/8, Seagate lost 1 1/8 to 58 5/8, Netcom Online sank 2 3/4 to 39 3/4 and Netscape dropped 2 7/8 to 56 1/4.
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.
* 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.
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.
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.
“It’s absolute pandemonium,” said one wheat trader.
Sparking the sell-off was a rumor that gripped the trading pit around midday that spring wheat was being railed into Chicago for delivery against the May wheat contract. Dealers could not confirm if that unusual development was true. “The wheat story has been going around for several days but there are still no deliveries. For some reason it got more attention today,” said Ron Kucha of O’Connor and Co.
