Jobs News Sends Yields Tumbling, Stocks Up
Investors reacted with relief Friday to the latest sign of moderating economic growth, sending bond yields to seven-week lows and the Dow Jones industrial average up 60.01 points to a record 5,992.86.
The government’s report that the U.S. economy lost 40,000 jobs last month returned Wall Street to bad-news-is-good-news mode: Investors who had feared that the Federal Reserve Board might tighten credit later this year to slow the economy now believe there is little chance of that happening.
“The report makes it crystal clear that the Fed doesn’t need to raise rates in October or November. And while the Fed’s away, the market will play,” said Peter Canelo, chief investment strategist at Dean Witter Reynolds.
Bond yields slid across the board Friday, with the 30-year Treasury bond yield ending the day at 6.74%, down from 6.83% Thursday and the lowest since Aug. 12, when the yield was 6.68%.
On Wall Street stocks staged a broad rally, with winners swamping losers by 18 to 7 on the New York Stock Exchange in active trading.
Although there was some disappointment that the Dow index couldn’t close above the 6,000 mark, the Standard & Poor’s 500 index of blue-chip stocks had its own milestone, topping 700 for the first time. The index jumped 8.68 points to a record 701.46.
“This is a good time to be investing,” argued Frederick Taylor, chief investment officer at U.S. Trust Corp., which manages $50 billion. Even though stocks are at record highs, Taylor and other analysts noted that declining interest rates are likely to increase stocks’ allure relative to fixed-income investments.
Indeed, interest rates have been falling worldwide in recent weeks. (Investor Spotlight, D5.)
U.S. bond yields have already dropped sharply since mid-July, when continuing signs of economic strength had many investors convinced that the Fed would tighten credit soon to slow the economy and keep inflation subdued.
The 30-year T-bond yield was as high as 7.19% on July 5.
Higher rates triggered a sharp pullback in the stock market in July, driving the Dow index down more than 10% from its May high to its intraday low in mid-July.
But stocks quickly rebounded in August and September as interest rates ratcheted lower with increasing signs of moderation in the economy.
The September employment report is the most solid evidence yet that the economy is slowing. “Job growth is the most influential thing on the economy,” argued Charles Smith, a bond fund manager at T. Rowe Price Associates.
Yet some experts cautioned against reading too much into one month’s numbers. Moreover, not all of the news in the employment report was welcomed by bond investors or by stock investors. In particular, a 6-cent rise in average hourly earnings suggested that wage inflation is continuing to rise. The risk is that faster wage growth, while welcomed by workers, could spur faster price inflation as well if businesses pass on wage increases to consumers.
In addition, analysts warn that the slowing economy could mean more disappointments ahead in corporate earnings growth.
“The other side of the coin is that we’re probably witnessing the peak of the economy now,” said Dan Ascani, research director at Global Market Strategists in Gainesville, Ga.
For the time being, however, many analysts think the bull market has further to run, if investors bet that the economy will slow enough to merit lower interest rates but not enough to stop earnings growth.
For stocks, “The only question is, ‘How high?’ ” said William Mattison, president of investment firm Gerard Klauer Mattison & Co. in New York.
Among Friday’s highlights:
* Smaller stocks advanced with blue chips, with the Nasdaq composite index gaining 14.47 points to 1,247.56, just below its record high of 1,249.15 set on June 5.
* In the Dow, DuPont surged 3 to 93 3/8, Exxon leaped 1 7/8 to 87 7/8, GE jumped 1 5/8 to 93 1/2, IBM rose 1 5/8 to 126 5/8 and Procter & Gamble advanced 1 3/4 to 99 7/8.
* Financial stocks boomed as interest rates fell. Merrill Lynch jumped 2 to 70 3/4, BankAmerica shot up 1 3/4 to 86 1/4 and SunAmerica leaped 2 1/2 to 39 1/8.
* Among tech issues, Intel soared 2 3/16 to 101 11/16, Sun Microsystems surged 2 3/4 to 64 3/8 and 3Com jumped 2 to 65 1/8.
* On the downside, companies warning of weaker earnings were hammered. They included Raytheon, down 4 to 49; Parker-Hannifin, down 2 3/8 to 38 1/8; Dole Food, down 2 7/8 to 40 1/8; and Redhook Ale, off 4 1/16 to 17.
* Among new stock issues, Arden Realty, owner of 24 office buildings in Southern California, sold 18.8 million shares at 20 each. The stock jumped to close at 22 1/2 on the NYSE.
* OUT OF WORK
The U.S. unemployment rate inched up to 5.2% for September. A1
