Dow Posts Gain Amid Signs of Uncertainty
Blue-chip stocks closed higher Tuesday as investors put their money into companies whose fortunes rise along with a growing economy. But worries that the economy is expanding too rapidly held the overall market lower, while bond yields soared.
The Dow Jones industrial average rose 36.52 points to close at 10,596.26 after being off as much as 150 points earlier in the session.
Broader stock indicators dropped. The technology-heavy Nasdaq composite index slumped 58.49 points to 2,412.03, while the blue-chip Standard & Poor’s 500 fell 7.58 to 1,294.26.
Concerns about inflation, which have increased the market’s volatility over the last two weeks, were behind Tuesday’s declines as well. Stock prices dropped after the National Assn. of Purchasing Management said the nation’s industrial economy expanded for a fourth straight month in May. The report, which gauges the health of the nation’s factories, was much stronger than expected.
The bond market offered little support for stocks. After the release of the purchasing managers’ report, the 30-year Treasury bond plunged, sending its yield up to 5.94% from late Friday’s 5.83%. The yield is now at its highest level in more than a year, presenting an attractive alternative to stocks.
The May economic report was highly anticipated as traders sought a sign that the economy is not overheating.
Instead, the report, which revealed strong price rises in raw materials for the first time in 16 months, sent stocks skidding.
“With all the skittishness about inflation, the real surprise from this report is that we didn’t drop even farther, even faster,” said William Meehan, chief market analyst for Cantor Fitzgerald.
Stock traders are increasingly worried that rising inflation will prompt the Federal Reserve to raise interest rates, leading to higher corporate borrowing costs and lower profits.
But by midafternoon, investors began picking up cyclical stocks that thrive on a growing economy. Aluminum company Alcoa gained $4.88 to $59.88, the strongest of the Dow components. Georgia Pacific, up $8.44 to $94.88, led a number of pulp and paper companies higher.
Analysts suggested that the afternoon rally may also have been fed by computer program-generated trades. Ricky Harrington, technical analyst at Wachovia Securities in Charlotte, N.C., said index fund managers may have been responsible for some buying tied to the start of a new month.
Technology stocks were mostly lower, including Dow component IBM, down $4 to $112. Hewlett-Packard fell $4.19 to $90.13 after an analyst at Bank of America Securities downgraded its stock.
Telebanc Financial shot up $8 to $74.50 after online brokerage E-Trade said it will acquire Telebanc to create an Internet-based financial services company. E-Trade fell $5.19 to $39.31.
Merrill Lynch, down $8.75 to $75.25, led a number of brokerage stocks lower after it announced plans to offer low-fee Internet stock trading. Conventional brokerages are facing competitive pressure from the growing number of online brokerages, and also fear losing their hefty commissions from full-fee services.
“The online business injects a measure of uncertainty to the brokerages,” Meehan said.
Wall Street is looking ahead to today’s speech by Federal Reserve Chairman Alan Greenspan and Friday’s Labor Department report on unemployment.
In Tuesday’s trading, declining issues outnumbered advancers by 10 to 9 on the New York Stock Exchange, with volume moderate.
The NYSE composite index fell 0.98 point to 621.28, the American Stock Exchange composite index fell 2.63 points to 776.11, and the Russell 2,000 index of smaller companies fell 1.22 points to 437.46.
Among the highlights:
* Other tech decliners included Motorola, off $4.06 at $78.75, and Microsoft, off $2.19 at $78.50. Amazon.com tumbled $12.94 to $105.81 after Barron’s magazine said the No. 1 online retailer’s shares are overvalued given increasing competition from companies that sell directly to consumers.
* Financial services stocks dropped, as these companies tend to be among the most sensitive to higher interest rates, which curb demand for loans and credit. Morgan Stanley Dean Witter slumped $4.75 to $91.75, Lehman Bros. Holdings fell $3 to $51.63 and Bear Stearns dropped $2.13 to $42.25.
* Airline stocks got a lift from the latest industry fare increase, the third of 1999. AMR, the parent company of American Airlines, rose $2.19 to $67.25. Northwest rose 75 cents to $34.
Market Roundup, C13
* INFLATION THREAT: Prices for raw materials rose for the first time in 16 months. C6
