Stocks Mixed and Bond Yields Fall as Investors Look Beyond Fed Action
With Federal Reserve policymakers doing as expected Tuesday, analysts said Wall Street will now focus its hopes and fears elsewhere--on corporate profits, the so-called Y2K computer bug and the dollar’s direction.
After weeks of anticipation, the bond market rallied while stocks closed mixed after the central bank raised its two key short-term interest rates by a quarter-point.
The Dow Jones industrial average, which had zoomed 199 points to a record high Monday, eased 16.46 points, to 11,283.30, rebounding from a late 105-point drop.
Losers topped winners by 17 to 13 on the Big Board.
The Nasdaq composite index, however, surged 1.2% to 2,752.37, continuing to recover from the beating it took in late July and early August in large part because of interest rate anxiety.
On top of Monday’s 2.7% jump, Tuesday’s advance left the Nasdaq index just 3.9% below its July 16 record high of 2,864.48.
Wall Street apparently concluded from the mild language accompanying the Fed’s rate announcement that it may be done tightening credit in 1999.
Indeed, a Reuters survey showed that the vast majority of Treasury bond dealers share that view.
Hence, the Treasury bond market on Tuesday continued a rally that has pulled yields down from 22-month highs in recent sessions. The yield on the benchmark 30-year T-bond ended at 5.93%, down from 5.98% Monday. The yield peaked at 6.28% on Aug. 12.
“If you’re a bond-market participant, you have to conclude that the Fed is pretty close to where they want to be,” said Stephen Slifer, economist at Lehman Bros.
The economy is showing signs of slowing toward the Fed’s target of 3% annual growth, Slifer said. If oil prices stay put, full-year consumer inflation could be as low as 1.5%, he said.
Long-term bond yields take their cue more from inflation expectations than from the Fed’s moves with short-term rates.
In the stock market, “With this [Fed] decision out of the way, investors have no reason to be on the sidelines,” said Alan F. Skrainka, chief market analyst at brokerage Edward Jones in St. Louis.
Skrainka said the focus now probably will shift to corporate earnings--which, he noted, are booming.
Third-quarter operating earnings for the Standard & Poor’s 500 blue-chip companies are expected to soar 21.4% over the corresponding period of 1998, which would make it the strongest quarter since the first quarter of 1995, according to First Call/Thomson Financial.
That big gain would in part reflect depressed results in 1998, when many companies were hurt by Asia’s economic crisis.
So far this year, rising corporate profits have more than offset rising interest rates, powering stocks higher, noted A. Marshall Acuff, strategist at Salomon Smith Barney.
Most years, he said, interest rate trends trump earnings.
The Dow is up 23% year to date, while the S&P; 500 is up 10.9% and the Nasdaq index is up 25.5%.
But a big unknown is how markets will react in the next few months with the approach of 2000.
Some analysts think the drop in Treasury bond yields in recent weeks may be due to more than just lowered inflation concerns and a sense that the Fed is done raising rates for now: Some investors may be buying Treasuries as a “safe haven” amid worries about the Y2K computer bug.
Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., has been warning of a credit crunch hitting Asia later this year because of Y2K concerns.
With the recovering Pacific Basin economy sending stock markets in many Asian countries up 50% or more so far this year, Weinberg thinks there will be a strong temptation to take profits.
Beset by financial crisis, Asian governments and companies are thought to have made a late and feeble start on fixing computers that may misread the “rollover” from 1999 to 2000.
Even if the Y2K bug doesn’t wreak havoc with communications and financial transactions, as some predict, a pullback by investors could be devastating to Asian markets, Weinberg said.
But it could help U.S. markets, if money searching for a safe resting place lands here.
That also could boost the dollar, which has been sliding against the Japanese yen, reflecting Japan’s economic recovery.
The dollar on Tuesday hit its lowest point against the yen since early January, closing at 110.80 yen, down 0.64 yen, despite the Fed’s rate increase.
A weaker dollar could fuel inflation by raising import prices.
But Lehman’s Slifer said the strength of the U.S. economy and stock market should be a natural barrier against much further slippage. “If I’m a foreign investor, this [U.S.] market looks good to me,” he said.
Market Roundup, C11
