Stocks Finish Mixed as Fed Holds the Line

Wall Street had no dramatic reaction to the Federal Reserve Board’s decision Tuesday to leave interest rates alone, with stocks closing mixed. Long-term bond yields slipped, although shorter-term yields tumbled.

Some analysts said the stock market’s climb to record highs in recent days was in anticipation of the Fed decision. Others suggested the market may actually have preferred a small rate increase now if it would lessen the odds of significant interest rate hikes later.

The Dow Jones industrials ended the day with a loss of 20.71 points to 5,874.03, after reaching a record 5,894.74 on Monday.

The Dow had surged more than 30 points after the Fed’s decision was announced at midday. But the rally quickly faded.

The blue-chip index was weighed-down throughout the day by a sharp decline in AT&T; shares after a disappointing earnings projection.

Broader indexes were mixed. The Standard & Poor’s 500 eased 0.87 point to 685.61, while the Nasdaq composite added 3.80 points to 1,215.27.

Advancing issues edged losers on the New York Stock Exchange, as trading ballooned to 460 million shares.

“It’s a market that’s stretched out and overbought, so a lot of people sold into” the rally, said Larry Rice, chief investment officer at Josephthal, Lyon & Ross.

In the bond market, short-term yields tumbled as traders brought rates into line with new expectations that the Fed will leave its benchmark short-term rate unchanged at 5.25% at least until the next Fed meeting, in mid-November.

The yield on three-month Treasury bills sank to 5.10% from 5.30% on Monday. The one-year T-bill yield dropped to 5.71% from 5.84%.

But longer-term yields dropped only modestly. The 30-year Treasury bond yield finished at 6.98%, down from 7.02% on Monday.

“The Fed was looking at the inflation glass and focused on it being half empty,” said Joseph Bench, who helps manage $1.5 billion for Capstone Asset Management. But if the economy gathers steam, “you could expect the Fed to raise rates at the Nov. 13 meeting, and by more than we would’ve expected this month.”

AT&T;’s announcement of an earnings shortfall reminded investors that third-quarter profit reports will be out soon, and, as usual, the next few weeks will be filled with warnings from companies that are coming up short for whatever reason. AT&T; slumped 5 5/8 to 51 1/2.

“When you get a big blue-chip name like AT&T; saying the third quarter isn’t going to be as good as what we thought, the ripple effect in the market has the potential to really start dragging down stock prices across the board,” warned Robert Froehlich, strategist at Van Kampen American Capital.

Among Tuesday’s highlights:

* Tech stocks were mixed. Some computer chip stocks benefited from a positive reaction to an Intel presentation and news that Morgan Stanley and Hambrecht & Quist had upgraded their assessments of the industry. Intel rose 3/4 to 96 1/2, Micron Technology surged 3 1/2 to 31 1/2 and Texas Instruments leaped 5 5/8 to 57 3/8.

* Among interest-rate-sensitive stocks, Wells Fargo rose 1 1/8 to 257 and Federal National Mortgage added 1/2 to 34 1/2, but Merrill Lynch fell 5/8 to 63 7/8 and BankAmerica was off 1 5/8 to 80 1/2.

Los Angeles-based Aames Financial slumped 4 1/8 to 48 7/8. The mortgage broker said it would issue 1.5 million new shares. Its stock was also lowered to “hold” from “buy” at Montgomery Securities.

* Apparel designer Mossimo extended its losses, falling 3 1/2 to 30 1/2 after sinking 7 on Monday on its warning that earnings would fall far short of analysts’ expectations.