Stocks Close Off Modestly, Bonds Steady After Turmoil
U.S. stocks closed broadly but modestly lower Monday, as investors showed somewhat surprising restraint after Friday’s steep plunge.
Bond yields, which had soared Friday on fresh signs of economic strength, rose early Monday but then fell back to close unchanged.
On Wall Street, the Dow Jones industrial average fell 37.31 points to 5,550.83, the lowest close in two months. Trading activity was moderate.
The market had started the day in a relatively calm mood after Friday’s 114.88-point Dow tumble, which was triggered by a severe bond market sell-off after the government’s June employment reports showed surprisingly robust job creation and wage gains.
Investors’ mood seemed to deteriorate in afternoon trading, however, even though bond yields pulled back from morning highs. The bellwether 30-year Treasury bond yield, which had rocketed from 6.93% to 7.19% on Friday, rose as high as 7.23% early Monday before trending lower to close unchanged for the day.
The fear of many stock and bond investors alike is that the Federal Reserve Board now has no choice but to officially boost short-term interest rates, to slow the economy’s pace. The June employment report suggested a tightening U.S. labor market with early signs of significant wage inflation--good news for workers, but frightening to financial markets because of memories of the wage-price inflation spiral of the 1970s.
Yet some bond investors said Monday that yields have already moved up enough this year to fully reflect an official Fed rate hike of at least half a percentage point.
Yields on 10-year Treasury notes have risen from 5.57% on Jan. 1 to 7.06% now. The Treasury will auction new 10-year notes today. (Investor Spotlight, D9.)
“These yields present pretty good value,” said Eric Cheung, who oversees the $3.5 billion of bonds at Wilmington Trust Corp. in Wilmington, Del. “We believe the economic numbers are going to be cooling off in the third or fourth quarter, so this isn’t too bad a level to buy the market.”
For the stock market, higher interest rates are a major threat because bonds could increasingly siphon away investors’ dollars.
“Any attempt to rally [the stock market] will fail,” predicted a bearish Michael Metz, investment strategist at Oppenheimer & Co. in New York. “This time around, it’s not a buying opportunity.”
Although market indexes lost only minor ground Monday, losers still outnumbered winners by more than 2 to 1 on the New York Stock Exchange and by nearly that margin on Nasdaq. Trading volume, however, was still restrained.
The Nasdaq composite index of mostly smaller stocks edged down 9.53 points, or 0.8%, to 1,148.82 after tumbling 2% on Friday. The Standard & Poor’s 500-stock index sank 4.90 points, or 0.8%, after dropping 2.2% on Friday.
Some bullish analysts say the stock may just need to see some healthy second-quarter corporate earnings reports to revive.
“The best antidote for an economy characterized by rising rates is strong corporate earnings growth,” said Jack Shaughnessy, director of research at Advest Inc.
Among Monday’s highlights:
* Banking and financial shares continued to slide, reacting to higher interest rates. Wells Fargo sank 4 1/2 to 230 3/4, NationsBank lost 1 5/8 to 80 3/8, Mellon Bank dropped 1 5/8 to 54, Merrill Lynch tumbled 2 1/8 to 60 5/8 and Salomon slid 1 5/8 to 41 3/8.
* Airline stocks were hit by profit taking. AMR, parent of American Airlines, dropped 3 1/4 to 82 1/4 after the Wall Street Journal said AMR’s plan to team with British Airways is under Justice Department scrutiny. Continental Airlines Class A shares fell 3 3/8 to 55 3/4 and Delta was off 2 1/2 to 77.
* Auto stocks continued to drop on concerns about slowing sales, even though the June employment data pointed to a stronger economy. Ford fell 1/2 to 30 7/8, GM was off 1/4 to 49 7/8 and Chrysler fell 5/8 to 57 1/4.
* Some tech issues bucked the market downtrend. Motorola rose 1 7/8 to 67 3/4 in advance of its second-quarter earnings report today. IBM added 1/2 to 98 3/8, Intel was up 7/8 to 73 and Microsoft gained 1 15/16 to 120 5/16.
But America Online slumped 3 1/8 to 38. On Friday the company agreed to pay its subscribers as much as $22 million in free online time, plus cash, to settle 11 private class-action lawsuits about disclosure and billing practices.
Also, software firm Isocor plunged 4 3/8 to 9 1/8 after projecting a second-quarter loss.
* Shares of many retailers dropped for a second session on concern that rising interest rates will make cash-strapped shoppers even more reluctant to take on more debt. Wal-Mart fell 1/2 to 24, Sears dropped 1 1/8 to 45 7/8 and Dayton Hudson slid 2 to 98 7/8.
Also, electronics retailer Tandy tumbled 4 5/8 to 40 5/8 after saying that sales at stores open at least a year dropped 2% in June.
Most foreign markets slumped, following Wall Street’s Friday decline. Mexico City’s Bolsa index slid 2.3%, Frankfurt’s DAX index dropped 1.3% and Tokyo’s Nikkei-225 index gave up 1.4%.
In currency trading, the dollar was little changed near a 29-month high against the Japanese yen.
