Dow Slides on Rate Fears; Techs Recover
Stock and bond markets closed mixed Thursday as Federal Reserve Board Chairman Alan Greenspan appeared to all but assure Wall Street of an interest-rate increase next Tuesday.
The Dow Jones industrials sank 57.40 points to 6,820.28, but that was largely the fault of Philip Morris, which plunged 6 1/8 to 115 7/8 on news that a rival cigarette maker has struck a deal that may undermine the industry’s defenses against health-liability lawsuits.
In the broad market losers topped winners by 16 to 10 on the New York Stock Exchange, but bargain hunters gave winners a slight edge in the Nasdaq market, where many technology stocks rebounded sharply from their recent drubbing.
In the bond market, meanwhile, short-term interest rates rose after Greenspan uttered his latest veiled threat to tighten credit. But long-term bond yields fell slightly.
In testimony to the Joint Economic Committee of Congress, Greenspan repeatedly stressed the importance of anticipatory action by the Fed--meaning that the central bank should act to restrain the economy’s growth rate long before inflationary pressures manifest themselves.
“It looks like [Greenspan] has just about pre-announced a rate hike,” said Scott Grannis, economist at Western Asset Management in Pasadena.
A recent Bloomberg News survey shows 60% of economists, traders and strategists at Wall Street’s 37 primary bond dealers said they expect a rate increase at the Fed’s Tuesday meeting.
But most analysts believe the Fed will boost its benchmark short-term rate just one-quarter point, from 5.25% to 5.50%.
Bond traders noted that short- and long-term market interest rates have already risen by more than one quarter point since mid-February, essentially building-in the expected Fed rate hike.
“A lot of people think that if the Fed tightens, it’s already priced into the bond market,” said Roy Blumberg, chief investment strategist at Josephthal Lyon & Ross.
On Thursday the yield on 3-month Treasury bills rose to 5.34% from 5.29% om Wednesday. The yield was 5.09% on Feb. 21.
The 2-year Treasury note yield, now 6.25%, is up from 5.84% on Feb. 21.
Some analysts believe that longer-term yields may begin to decline soon, on the expectation that a credit-tightening move by the Fed will ultimately be good for the economy by slowing growth and keeping inflation at bay.
Indeed, the yield on the bellwether 30-year Treasury bond slipped Thursday to 6.95% from 6.98% on Wednesday, even as short-term rates rose.
But analysts also note that both the bond and stock markets could be in for a rougher ride ahead if it appears that a Fed rate boost next week will just be the first of many.
Among Thursday’s highlights:
* Tech stocks were broadly higher as buyers swooped in.
With the tech-heavy Nasdaq composite stock index falling 10% in recent weeks from its record high, “That seems to be a magical level that brings out the bargain hunters,” said Charlie Crane of Key Asset Management.
Leading the tech rebound were Dell Computer, up 3 3/4 to 66 5/8; Sun Microsystems, up 2 1/8 to 28 3/4; Ascend Communications, up 4 1/2 to 50 1/4; Yahoo, up 4 1/4 to 29; and Computer Sciences, up 3 1/4 to 65 1/2.
* Computer networker 3Com rose 1 7/16 to 33 5/8. After the market closed the firm reported quarterly per-share earnings up 12% on a 30% increase in sales. In addition, the company was upbeat about future sales, saying “the fundamentals of the industry remain very strong” despite a recent slowdown in growth.
* Tobacco shares slid sharply on news that Liggett Group, the smallest of the major U.S. tobacco companies, had agreed to break ranks again and settle 22 state lawsuits by admitting that smoking is addictive and causes cancer.
Besides Philip Morris, other tobacco shares slumping were RJR Nabisco, down 3/4 to 31 1/2; Loews, off 2 1/4 to 98 1/2; and UST, down 1 1/8 to 27 3/4. But Brooke Group, parent of Liggett, rose 5/8 to 4 7/8.
* Bank and utility stocks--sensitive to interest-rate shifts--continued to weaken. The Dow utility stock index fell 0.6% to 220.09. The Standard & Poor’s financial-stock index lost 0.3% to 90.50.
In currency trading, the dollar ended broadly higher, boosted by Greenspan’s comments, reversing earlier losses that followed a report showing the nation’s trade deficit widened to its highest level in nearly a decade.
Against the Japanese yen, the dollar rose to 123.75 at the close, compared with 122.82 Wednesday.
It also rose against the German mark even as European bond yields rose sharply. (Investor Spotlight, D8.)
