Stocks, Bonds Rebound From Early Plunge
U.S. financial markets rallied in late trading after an initial tumble early Tuesday, in a wild session buffeted by soaring oil prices and more strong economic data.
By the close of trading, the Dow Jones industrial average was up 32.18 points to 5,648.39, after falling more than 50 points in the early morning.
But the Dow was bolstered by hefty gains in its three component oil stocks. Losers still outnumbered winners by 1,395 to 1,027 on the New York Stock Exchange.
In the bond market, yields soared early in the day, reacting to oil prices and to reports painting a still-vigorous picture of the U.S. economy. However, the sell-off quickly ran out of steam, and buyers flocked back to bonds.
The yield on the benchmark 30-year Treasury bond closed at 7.05%, down from 7.19% early in the day and down from 7.12% on Friday.
Rocketing oil prices set the morning tone, after the U.S. launched missiles against Iraq in retaliation for Iraq’s attacks on its Kurdish minority.
Near-term oil futures in New York were up as much as $2 a barrel, but they gave back nearly half of that by the close.
Meanwhile, the economic news provided more proof that business activity remains healthy. The Conference Board’s index of leading economic indicators for July showed a strong gain. And a key index of manufacturing activity nationwide in August also advanced.
But bond traders said the manufacturing activity report was only marginally above expectations, and that gave buyers an excuse to jump into the market, with long-term yields at their highest levels since early July.
Yields have jumped in recent weeks, with each successive report suggesting that the economy is growing more quickly than the inflation-wary Federal Reserve Board would like.
Analysts say many bond investors now are in one of two camps: Either they think the economy still isn’t strong enough to merit an interest rate increase by the Fed, or they think the Fed will raise rates but that any such credit-tightening will be over quickly.
“I don’t buy that the economy is taking off,” said Graham Tanaka, president of Tanaka Capital Management in New York, which manages about $200 million.
“Most likely, the Fed will raise rates, but it won’t be a prolonged period of tightening,” said Bill Sharp, a Smith Barney economist.
Moreover, “the Fed coming in to keep inflation from accelerating is good news” for long-term bonds, Sharp said, because long-term yields tend to be determined by investors’ inflation expectations.
Whatever the reason, the rally in bonds helped stocks recover Tuesday afternoon.
The Nasdaq composite index of smaller stocks eked out a small gain, adding 0.79 point to 1,142.29 after falling as low 1,123 in early trading. The Standard & Poor’s 500 index of blue-chip issues rose 2.73 points to 654.72.
“The tradition is that any dip is a time to buy,” said Michael Metz, analyst at brokerage Oppenheimer & Co. in New York, noting the stock market’s quick recovery in August from its July slump.
Interestingly, gold failed to rally Tuesday, suggesting little concern that the latest U.S.-Iraq conflict will snowball.
Near-term gold futures fell 80 cents to $386.10 an ounce on the Comex in New York.
Among Tuesday’s highlights:
* Energy shares were the day’s standout performers, naturally, on expectations that higher oil prices will boost profits. In the Dow index, Texaco soared 3 1/8 to 91 7/8, Exxon gained 2 1/4 to 83 3/4 and Chevron added 1 to 59 7/8.
Other energy-related winners included Unocal, up 7/8 to 35 1/8; Western Atlas, up 3/4 to 61 1/2; Dresser Industries, up 3/4 to 29 3/4; and Williams, up 1 to 50 7/8.
* Airline stocks were, as usual, victims of higher oil prices. Delta fell 2 to 68 7/8, USAir lost 1/2 to 17 3/8 and Northwest eased 1/2 to 37 1/4.
* Some big tech issues rallied. Intel added 1 13/16 to 81 5/8, Hewlett-Packard was up 7/8 to 44 5/8 and IBM rose 7/8 to 115 1/4. But Digital Equipment sank 1 5/8 to 37. After the market closed, the company said orders in the current quarter are slower than expected.
* Some investors appeared to be hunting for beneficiaries of a strong economy and focused on steel issues. USX-U.S. Steel jumped 2 to 29 1/2 and Nucor sprinted 1 7/8 to 48 5/8.
* Shares of Arcadian, which says it is the largest producer of nitrogen fertilizers in the Western Hemisphere, rose 11% after Potash agreed to pay $25 to $27 a share for the company, canceling Freeport-McMoRan’s earlier bid. Shares in Arcadian rose 2 1/2 to 24 1/2. Potash lost 2 1/4 to 73 3/4.
* HFS fell 3 5/8 to 56 1/4 after the hotel and real estate franchiser told analysts and investors that Chief Executive Henry Silverman will sell as much as 5% of his HFS stake each year. Silverman has not sold any shares since the company went public in 1992.
* Youth Services plunged 5 to 14 3/8 after the operator of centers for troubled youth said its current-quarter earnings will be below expectations because of depressed results at a subsidiary and one-time debt-conversion costs.
In foreign trading, most markets were lower in the wake of Wall Street’s sell-off late last week. In Mexico, the Bolsa index sank 1.3% to 3,266.99 as the peso weakened again in the wake of recent rebel attacks against the government.
Market Roundup, D6