Dow Ends Down 59 Points Amid Fears of Fed Action
Stocks slid Tuesday after another robust economic report fanned inflation fears and firmed expectations the Federal Reserve Board will slow the economy--and company profits--by raising interest rates.
The Dow Jones industrial average plunged to a loss of nearly 101 points with about a half-hour remaining before recovering somewhat to 6,896.56, down 58.92 on the day.
Broader indicators also fell despite a fairly encouraging session in the bond market, where prices quickly rebounded from an early drop that boosted long-term interest rates above 7%.
Bond prices briefly fell after the Commerce Department reported that construction of new homes and apartments unexpectedly shot up 12.2% in February to the highest level in nearly three years. The strong reading aggravated fears that although inflation has remained tame, consumer demand may squeeze price pressures such as production costs.
Fed policymakers are scheduled to meet next week to decide whether the inflationary threat is serious enough to raise its key lending rates, slowing borrowing and spending. The growing belief that the Fed will raise rates has pressured bonds for weeks.
“This market is obsessed with March 25,” said Jack Shaughnessy, director of research at Advest. “The strong housing numbers . . . contributed to that.”
He said the stock market appeared prepared for a marginal increase of a quarter point in short-term rates, but “there’s a fear there might be even more of an increase.”
Higher interest rates would hurt corporate profits and thus, stock prices.
As bond prices fell Tuesday morning, the yield on the benchmark 30-year Treasury jumped above 7%. But Treasuries quickly recovered and the yield pulled back near late Monday’s 6.95%, settling at 6.96%.
Municipal bonds were little changed as several states and municipalities sold $1.7 billion in new bonds.
In the biggest sale, California sold $525 million of general obligation bonds in a competitive sale won by BA Securities Inc., the state’s first such sale since October.
Declining issues outnumbered advancers by nearly a 2-to-1 margin on the New York Stock Exchange in moderate trading.
The Standard & Poor’s 500-stock list fell 6.05 points to 789.66, and the NYSE’s composite index fell 2.97 points to 415.40. The Nasdaq composite index fell 10.09 points to 1,269.34.
With several major reports to come before the meeting of central bank policymakers, analysts said volatility was only going to increase in the days ahead.
Today the consumer price index for February will be released and triple witching on Wall Street hits Friday.
“Until the Fed drops the other shoe or puts it back on its foot, this market is going to stay whippy,” said Alfred Goldman, technical analyst at A.G. Edwards & Sons.
Among Tuesday’s highlights:
* The shaky interest rate backdrop continued to weigh down banks and other financial services companies, which enjoy a smaller profit margin on loans as rates rise. Chase Manhattan fell 3 1/4 to 99 1/2, and J.P. Morgan fell 3 3/8 to 105 as the Dow’s weakest component.
* A number of credit card companies sank after the second report this week of weak company earnings due to a higher number of delinquencies. First Chicago, down 2 5/8 to 55 3/4, said it expected lower results. Advanta, down 1 1/8 to 30 3/4, on Monday said it faced a $20 million first-quarter loss.
Banc One fell 1 to 43 1/8, First USA dropped 1 5/8 to 47 5/8 and Dean Witter, Discover lost 1 1/8 to 37 1/8.
* The day’s profit taking also hit issues whose fortunes rely on the business cycle. Other Dow decliners included Boeing, down 2 3/4 to 103 3/4; DuPont, down 2 7/8 to 111; United Technologies, down 1 1/2 to 73 7/8; and Alcoa, down 1 3/8 to 73 7/8.
* Micron Technology fell 4 1/8 to 40 despite late Monday’s slightly better-than-expected earnings report.
Overseas, Tokyo’s Nikkei stock average rose 2.2%, Frankfurt’s DAX index fell 1.8%, and London’s FTSE-100 fell 0.4%.
