Wall St. Rallies, Then Fizzles; Dow Ends Up Just 2.84
Wall Street launched the new year with a powerful early rally Monday, but it fizzled by midday as investors seemed hard pressed to find stocks whose probable earnings can justify their high prices.
The Dow Jones industrial average rose as much as 169 points--to within 25 points of its record high set Nov. 23--but ended up just 2.84 points at 9,184.27.
Stocks started the day with a strong tail wind from Europe, where equity markets surged with the introduction of the new euro common currency.
But while the euro gained against the dollar in its first day of trading, the biggest news for the dollar was its plunge against the Japanese yen. The dollar dropped as low as 111.57 yen--weakest since June 1997--before closing at 112.07, versus 113.57 Thursday.
The dollar’s fall continued a months-long trend of decline against the Japanese currency. The dollar has fallen one-third from an August peak of over 147 yen.
Traders on Monday said that a surge in Japanese government bond yields in recent weeks--to nearly 2% on 10-year bonds--is attracting Japanese buyers and adding to the yen’s strength.
While Japanese yields remain far below those of the rest of the world, for Japanese investors these are the highest bond yields since late 1997.
The jump in rates, fueled by fears of the government’s massive borrowing plans, is another dose of bad news for Japan--as is the yen’s strength. Higher rates will make economic recovery more difficult; a stronger currency will hurt Japanese exports.
Reflecting all of that, Japan’s Nikkei-225 stock index opened 1999 with a 3.1% drop, to a three-month low of 13,415.89.
At midday today in Tokyo, the Nikkei was down 2.1% to 13,140.
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On Wall Street, meanwhile, “people came in with a lot of first-of-the-new-year enthusiasm, and the market overdid it a little in the blue chips,” said Alfred E. Goldman, chief market strategist at A.G. Edwards & Co. in St. Louis.
Goldman expects big-company stocks to continue leading the market upward, but he said the rally appeared “exhausted” after the Dow’s surge early Monday.
The Standard & Poor’s 500-stock index also faded after an early gain. It closed down slightly.
But winners still topped losers by 17 to 14 on the New York Stock Exchange in heavy trading.
And the technology-heavy Nasdaq composite, up 55% since Oct. 8, burst through the 2,200 barrier for the first time to close at a record 2,208.05, up 15.36.
Aside from the amazing performance of Internet-related stocks such as online bookseller Amazon.com--up $33.69 Monday to close at $354.94--the story of the stock market’s surge since its early October low point has been the powerful rally in the biggest high-tech names, including Microsoft, Intel and IBM.
Although they are slightly down from their pre-Christmas highs, those three leaders all have gained more than 50% since early October. In Microsoft’s case, that has meant a $124-billion gain in the total market value of its outstanding shares, to $352 billion.
Many big-name stocks that were on analysts’ “buy” lists a few months or even weeks ago have already risen beyond their target prices, making them look expensive, noted Scott Bleier, chief investment strategist for Prime Charter in New York.
The toughest trick going forward may be finding other stocks to replace them, he said, adding: “The chase for relative performance is reaching a frenzied state.”
In the past, under-performing stocks, particularly smaller ones, have benefited from a so-called January effect--a rise in price as investors put money back into issues that had been sold in December for the purpose of taking tax losses.
Few experts were able to see any indication Monday of a January effect beginning. Indeed, the Russell 2,000 index of small stocks eased 0.2% after rising Thursday.
The market still seems overwhelmingly focused on a few giant blue-chip names, analysts said.
Blue chips and Internet stocks, that is. Among Net-related stocks on Monday, Inktomi jumped $10.75 to $140.13, Broadcom rose $6.13 to $126.88 and @Home gained $4.75 to $79.
The stunning spectacle of virtually unknown stocks that double or triple in a day simply because of their connection with the information superhighway has been a distraction for many ordinary investors, some market watchers say.
“Amazon moves more in a day than Disney does in a year,” said James R. Miller, chief of Nasdaq trading at Robert W. Baird & Co. in Milwaukee.
Salespeople at Miller’s firm have complained that it is hard to sell customers on the virtues of a stock that, with luck, might rise from $13 a share to $20 a share this year, when Internet issues are leaping that much in a few hours.
“Until the Internet bubble bursts, I don’t think you’ll get a real move in the secondary stocks,” Miller said.
Another potential stumbling block for the market may be supply, said Michael Clark, chief of equity trading for CS First Boston. After a fairly light calendar of stock offerings recently, investors may be daunted by a flood of new issues early this year, he said.
Fifty-five offerings, valued at more than $2 billion, are scheduled for this month, according to Securities Data Co. While that is not a historically high number, an additional 45 deals held over from December could make for a very busy month.
On the other hand, even more stock is being drained out of circulation by means of mergers and acquisitions and share buybacks, noted Ned Riley, chief investment officer at Bank of Boston.
On the negative side, analysts are still too optimistic about the earnings prospects of big companies this year, Riley said. The Wall Street consensus for average 1999 profit growth for S&P; 500 firms remains 17%, which Riley believes is unattainable.
He expects companies to engage in a round of truth-telling early this year to steer analysts toward more realistic growth estimates. The result could be a near-term pullback in stocks but a stronger market in the long run, he said.
Market Roundup, C14
* STOCKS FOR ‘99: A special screen of blue-chip shares isolates 20 top picks. C6
