Stocks Mixed Ahead of Fed’s Policy Meeting
Wall Street mustered only a mixed finish Monday as many investors waited to see how aggressively the Federal Reserve cuts short-term interest rates, as central-bank policymakers meet today.
With Fed Chairman Alan Greenspan last week signaling that a cut was imminent, the only issue is whether the central bank reduces the benchmark federal funds rate by a quarter or half a percentage point, from the current 5.5%.
In the stock market, anticipation of lower rates helped send the blue-chip Dow Jones industrial average up 80.07 points, or 1%, to 8,108.84 on Monday.
But the broad market was mixed, with losers holding a slight edge over winners on the Nasdaq market, and with the Nasdaq composite index easing 4.37 points, or 0.3%, to 1,739.22.
Even though the U.S. economy remains robust, with both low unemployment and low inflation, Greenspan has signaled during the last three weeks that he believes lower rates are needed to head off a potentially serious threat to continued U.S. economic growth--a dearth of credit.
“Lenders and investors are evaluating credit in a completely different way than they were two months ago,” said Mellon Bank Corp. economist Richard Berner.
With the carnage in many developing countries’ stock and bond markets since June, with major banks and brokerages racking up huge trading losses, and with last week’s near-failure of a giant private investment fund, investors around the world have suddenly become “risk-averse”--meaning they are more worried about protecting their capital than in getting high returns.
As a consequence, companies have found it almost impossible to sell new shares. Lower-rated corporations can’t sell bonds
and banks have tightened their lending standards.
In that kind of environment, “a Fed rate cut will act as an insurance policy,” said Mickey Levy, chief economist for NationsBanc Montgomery Securities in New York. “The Fed’s intent is to improve market psychology by making clear that the world’s largest central bank is willing to do its part to try to minimize further market contagion.”
The Fed hasn’t reduced the federal funds rate, which is the overnight loan rate among banks, since January 1996.
In the bond market on Monday yields mostly edged higher, after diving last week after Greenspan all but promised a rate cut.
The yield on the one-year Treasury note ended at 4.52%, up from 4.47% on Friday.
The 30-year T-bond yield rose to 5.15% from 5.12%.
Analysts said the bond market could be disappointed if the Fed opts to cut the fed funds rate by a quarter-point instead of half a point.
Still, many believe the trend in Treasury yields will continue to be down, as investors seek safe-haven investments amid what is expected to be a slowing world economy in 1999.
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For stocks, because the Dow has already rebounded 700 points since bottoming out at 7,400 on Sept. 1, the stimulative potential of a rate cut may already be reflected at the market’s current level, analysts cautioned.
“There’s a war going on between those who think a rate cut will mean positive things for the market and those who think it’s already priced into the market,” said William P. Miller, chief investment officer for large-cap equities at American Express Asset Management Group in Minneapolis.
“Given that the stock market is up 10% this month so far, it’s probably fair to assume that some of that good news has gone into the stock market, so some people took some profits going into the meeting,” Miller said.
Among Monday’s highlights:
* The Dow was buoyed by a pair of big stock-buyback plans announced by McDonald’s and American Express, as well as news on the planned spinoff by DuPont of its Conoco energy unit.
McDonald’s rose $2.63 to $59.88 after the fast-food giant said it will buy back $3.5 billion of its common stock in a repurchase plan 75% larger than the one it completed last month.
American Express gained $2.50 to $83 after its board approved a stock buyback of up to 40 million additional shares over the next two to three years, representing about 9% of its common shares.
DuPont jumped $2.88 to $61.63 as it detailed plans for its Conoco spinoff.
* Tech stocks were mixed, with Intel off $1.31 to $87 and Compaq down 63 cents to $32.81, while Dell Computer gained $2 to $68.06 and Adobe Systems rose $1.44 to $34.88.
* Agouron Pharmaceuticals rose $1.88 to $34.25 after the biotechnology company said it could begin testing an experimental drug to help people fight the common cold.
* Major drug stocks were mostly higher. Johnson & Johnson rose $2.19 to $80 and Schering-Plough surged $3.50 to $104.75.
* Financial stocks also were mixed. On the downside, FirstPlus Financial plunged $7.81 to $15.06, Merrill Lynch sank $1.56 to $50.94 and Lehman Bros. lost $3.13 to $30.13.
“Brokerage stocks have had a rough going,” said Laszlo Birinyi, president of Birinyi Associates Inc. a Greenwich, Conn., investment research and management firm. “There is concern other shoes are going to drop.”
* Many gold mining stocks added to recent gains. Barrick Gold rose 88 cents to $21.38; Newmont Gold jumped $2 to $26.75.
Overseas, Tokyo’s Nikkei 225-stock average rose 1.4% following an agreement between the ruling party and the major opposition parties on a key set of bills to clean up Japan’s troubled financial system.
Frankfurt’s DAX index rose 2% as German elections resulted in a new government.
London’s FTSE-100 rose 0.6%.
Latin American markets were mostly higher, with Brazil up 1.7% and Mexico up 0.4%.
In currency markets, the dollar fell to 135.85 yen from 136.25 on Friday, after rising as high as 136.89 earlier on news that Japan’s second-largest leasing company went bankrupt. The dollar fell against the German mark.
Market Roundup, D14
