Jittery Stock, Bond Markets Fall Broadly
Speculation that Japanese and other foreign investors might back away from the U.S. Treasury market helped trigger a broad sell-off in the bond and stock markets Wednesday, adding jitters to an already fretful Wall Street.
The Dow Jones industrial average, after sliding 129 points by midday, struggled back to close at 6,402.52, down 70.73 points, or 1.1%--its second big drop in the last week. Adding to the downward pressure was a poor earnings projection from Union Carbide Corp., one of the 30 stocks that make up the blue-chip index.
In the broader market, the Standard & Poor’s 500 index fell 6.81 points to 740.73 after being down as much as 14.79. The Nasdaq composite dropped 3.43 points to 1,309.12, rebounding from a 21.04-point decline. All the indexes are higher than Friday’s closes and remain very near historic highs.
Wednesday’s trouble began in the bond market. The yield on the benchmark 30-year Treasury bond soared from 6.49% Tuesday to 6.63% at Wednesday’s close--the highest since Nov. 6--as bond prices, which move in the opposite direction, suffered the biggest one-day loss in five months. Prices dropped nearly 2 points, or $20 per $1,000 of face value.
Jeffrey Applegate, investment strategist for Lehman Bros., remains optimistic about the outlook for stocks, but said: “I don’t think equities can sit there and say everything’s fine when the bond market acts this way. One of the reasons the stock market has done so well since September has been the bond-market rally.”
Wednesday’s bond sell-off was sparked by a story in the Wall Street Journal raising fears that Japanese institutions--active buyers of Treasury issues in recent months--might slacken their purchases.
As U.S. investors have become more global in their outlook, buying about $144 billion of foreign-government securities in the 12 months ended Sept. 30, foreign investors have provided crucial support for the Treasury market, said Tom Sowanick, chief fixed-income strategist for Merrill Lynch. Any major pullback could potentially hurt Treasury bond prices, sending yields higher.
Another negative factor, experts said, was continuing fallout from last Thursday’s speech by Federal Reserve Chairman Alan Greenspan in which he seemed to warn about a possible speculative bubble in U.S. securities markets.
Greenspan’s musings about “irrational exuberance” among investors made many bond investors conclude that the Fed would not soon ease interest rates, said Michael Kennedy, Chicago-based manager of the SteinRoe Government Income Fund. He said some investors had already built an interest-rate cut into their appraisal of bond prices; with a cut unlikely, they adjusted.
On Wall Street, the Journal article on Japan “did a very good job of putting the fear of God into the stock market before we even got to work,” said Philip Orlando, chief investment officer for Value Line Asset Management.
A government report Wednesday that the “core rate” of inflation at the wholesale level--subtracting volatile food and energy prices--had gained only 0.1% in November should have been encouraging to investors, Orlando said, adding: “On a normal day, without Japan, bonds would have gained a point.”
November data on the government’s more closely watched inflation indicator, the consumer price index, will be announced this morning. Experts thought the stock and bond markets could be in for another rough session today if the number is unexpectedly high.
Some analysts also were unhappy Wednesday with the Investment Company Institute’s estimate that stock mutual funds took in a net $15.5 billion in fresh cash in November, up just 15% from October’s inflow and far off from the $17.4 billion of September. Stock fund inflows have been critical in supplying fodder for a rising market in recent years.
Still, for the months ahead in the stock market, “the preconditions for a sizable correction of 15% to 25% are simply absent,” said Lehman’s Applegate. “We’re still bullish and fully invested.”
Orlando said he expects next year’s big earnings increases to come from large technology firms such as Microsoft, Cisco Systems and Intel--the same sector that rallied strongly late Wednesday to erase much of the earlier damage, particularly among Nasdaq stocks.
Meanwhile, bond analysts were split on the longer-term outlook for interest rates and inflation. Merrill’s Sowanick said an uptick in wages reported by the government last week demonstrates that economic growth is not as weak as many people think. He believes 30-year Treasuries are headed back to the 7% yield range.
James Bianco, director of research for Arbor Trading Group, a bond-trading firm in suburban Chicago, thinks the bond market could be dragged down by huge hedge funds, which trade massive amounts of bonds using borrowed money.
The hedge funds have been a bullish influence through the fall, driving yields lower, but Bianco said the margin between what the hedge funds pay to borrow and the earnings on their bonds is narrowing, which may prompt them to exit the market abruptly.
Kennedy is much more bullish. “We think ultimately the [30-year] bond will get back down to 6.125% or 6.25% within a few months, but we’ve just hit a bump in the road at the moment.”
Despite worries about foreign investors’ intentions in the bond market, the dollar was down only slightly Wednesday against the Japanese yen, suggesting no rush to sell.
Among Wednesday’s highlights:
* Union Carbide led the Dow lower after warning that current-quarter earnings will be about half the year-ago results. The stock tumbled 2 5/8 to 42 1/4. The company blamed higher prices for oil, the basic material for plastics. Carbide said it will boost prices for polyethylene and ethylene glycol on Jan. 1, in an attempt to restore earnings growth.
Other chemical stocks also fell. Dow Chemical lost 1 1/8 to 81 1/4; PPG Industries fell 2 to 58.
* Bank stocks, which suffer when interest rates rise, were broadly lower. Chase Manhattan fell 1 1/4 to 88 5/8 and Citicorp lost 2 3/4 to 101.
* IBM was off 1 7/8 to 156 1/8. The company declined comment on market rumors that it was about to issue a profit warning.
* On the plus side, Intel surged 7 3/4 to 136 7/8 after Merrill Lynch analyst Thomas Kurlak raised his 1997 earnings estimate on the computer chip giant. Also, an Intel manufacturing executive told a Montgomery Securities conference in San Francisco that the company’s chip-making factories were at full production and essentially sold out through March, 1997.
* Alexander & Alexander Services rose 3 to 17 1/8 and Aon added 1 1/4 to 58 7/8. Aon agreed to acquire Alexander & Alexander for $17.50 per common share.
Note: The weekly Money Market Funds chart does not appear today.
