Fears of Rate Hike by Fed Clip Stocks
U.S. stocks fell Tuesday for the first time in five sessions as investors worried that data coming out later this week could show a strong economy and prompt the Federal Reserve Board to raise interest rates. Banking stocks retreated.
The Dow Jones industrial average slumped 45.09 points, or 0.5%, to 9,147.57, after rallying 3.3% in the previous four sessions. The Standard & Poor’s 500-stock index fell 6.57 points, or 0.6%, to 1,115.50 and the Nasdaq composite dropped 13.95 points, or 0.7%, to 1,864.91.
The Dow on Monday had notched its first record close since April 21. But the blue-chip index fell from the outset Tuesday and was off as many as 88 points at 2 p.m. PDT before recovering late in the day.
“Whenever we reach new highs, the market’s always looking for a reason to give it back,” said Arthur Hogan, senior sales trader at Jefferies & Co. in Boston.
Stocks were pressured throughout the session by a weak bond market, where the yield on the 30-year Treasury--a key determinant of borrowing costs for companies and consumers--rose to 5.98% from 5.93% on Monday.
Bonds struggled after a top official at the International Monetary Fund declared that the Federal Reserve won’t be able to put off a rate increase for long. Michel Camdessus, IMF managing director, said he expects the Fed to boost rates “sooner rather than later.”
Later, Alfred Broaddus, president of the Federal Reserve Bank of Michigan, said, “With activity already at a high level, clearly there is a risk that the economy could overheat at some point.”
The comments quickly reopened the inflation debate that unexpectedly flared up last week, but was seemingly resolved only days later by a series of encouraging economic reports.
In addition to causing borrowing costs to shoot higher, rising interest rates make returns on bonds relatively more attractive than those offered on stocks.
One of the more heavily scrutinized economic reports will be released on Friday. The monthly employment report is considered one of the best indicators of the economy’s strength and whether inflation will accelerate or remain in check.
One of Monday’s biggest advancers gave back some of its gain on Tuesday. EntreMed fell $8.69 to $43.13 after the stock was downgraded to “neutral” from “venture” at Lehman Bros. It had more than quadrupled a day earlier after the National Cancer Institute said two of the company’s drugs offer the best hope for treating cancer.
Though stocks had moved up in recent days, some of the market’s so-called technical indicators have been negative. Technicians watch such dynamics as the market’s price and volume action to gauge where stocks are headed.
Gail Dudack, a market strategist at UBS Securities Inc. in New York, pointed out that share volume during the market’s recent gains has been meager. An average of 583 million shares traded on the New York Stock Exchange in the last week, below the average of 625 million for the year. Market watchers like to see heavy volume on up days. That’s a sign of healthy demand as investors clamor to get into stocks. Light volume, by contrast, underscores a lack of conviction behind the rally.
“Technical indicators have deteriorated badly,” Dudack said.
On Tuesday, roughly nine NYSE stocks fell for every five that rose. About 583 million shares changed hands, up 4% from the 552 million traded on Monday.
Among Tuesday’s highlights:
* Citicorp led interest-sensitive banks lower, losing $2.94 to $149.69. BankAmerica slid $1.94 to $84.56.
* Oil companies declined as the price of crude slumped 48 cents a barrel to $15.47. Analysts are becoming more pessimistic that a new round of cuts in global supply will be agreed upon soon. Amoco fell $1.06 to $44.50, Exxon dropped 75 cents to $74 and Mobil slipped 25 cents to $81.06.
* Among the day’s bright spots, Donna Karan International rose $1.75 to $16. The apparel maker reported first-quarter net income of 10 cents a diluted share, double analysts’ estimates.
