Stocks See Late Rally as Bond Yields Fall
Stocks rallied at the end of an erratic session Wednesday as falling bond yields dampened worries about the Federal Reserve’s warning Tuesday about interest rates.
In other trading, gold fell to a new 20-year low. The dollar rose to a seven-month high against the yen, bolstered by the Fed.
On Wall Street, the Dow Jones industrial average added 50.44 points, or 0.5%, to close at 10,887.39 after changing direction several times.
Broader stock indicators also closed higher. The Standard & Poor’s 500 index gained 0.8%; the Nasdaq composite rose 0.7%.
In the bond market, where yields have been rising for most of this year on worries about the economy’s strength, buyers jumped in on Wednesday.
Despite the Fed’s warning Tuesday that it has adopted a “bias” toward raising rates in the future because of the threat of higher inflation, some investors saw that announcement as positive for bonds.
“Bonds should do better with the Fed telling the market it won’t even allow the thought of inflation,” said Charles Ullerich, who helps oversee $2 billion of bonds at Pilgrim Funds in Phoenix.
Inflation is bonds’ worst enemy because it eats away at the value of the securities’ fixed payments.
The yield on the one-year Treasury bill eased to 4.87% from 4.91% on Tuesday. The yield on the 30-year T-bond took a bigger dive, falling to 5.80% from 5.88%.
Some traders said there were rumors of global investors borrowing in Japan--at that country’s rock-bottom interest rates--to buy U.S. bonds.
Bonds’ strength helped boost the dollar, which rose to 124.21 yen, up 1.01 from Tuesday.
Bonds are looking more attractive compared to stocks because higher interest rates could topple equities from their record highs, said Mitchell Stapley, who oversees $3 billion of assets at the Kent Funds in Grand Rapids, Mich.
Yet the stock market’s rally continues to broaden: Winners topped losers by 17 to 13 on the New York Stock Exchange on Wednesday, and by 21 to 18 on Nasdaq.
Despite the threat that the Fed could raise interest rates in the months ahead, the Dow index has fallen only 2% from its record high of 11,107.19 set on May 13.
Still, “there’s a lot of confusion, illustrated by the paucity of volume,” said William Meehan, analyst for Cantor Fitzgerald. Trading has been sluggish lately.
What was good for the dollar Wednesday was bad for gold: The metal fell for a fourth day, dropping to the lowest closing price in 20 years, on expectations that a rising dollar will hurt demand from investors and jewelers at a time when Britain and other nations are expected to sell gold reserves.
“Gold competes with the dollar as a store of value, and gold is losing,” said Bart Kitner, president of Kitco Minerals & Metals in Montreal, a precious metals refiner.
Gold futures for June fellto $273.10 an ounce in New York.
Among Wednesday’s highlights:
* Some industrial stocks rebounded after slumping on Tuesday after the Fed announcement. Deere gained $1.38 to $39.88, Illinois Tool Works rose $1.50 to $75.88, Weyerhaeuser gained $1.19 to $67.06 and General Electric jumped $3.75 to $108.
* Tech stocks were mixed. The computer chip area was strong, led by Texas Instruments, up $3.25 to $117.38; Applied Materials, up $2.19 to $65.31; and Advanced Micro Devices, up $2.25 to $21.63.
Software stocks also gained, led by SAP, up $2.63 to $36.25. Lehman Bros. analyst Brian Skiba upgraded SAP to “buy” from “neutral” on sales growth optimism for so-called enterprise software.
Also gaining: Oracle, up $1.56 to $26.38, and PeopleSoft, up $1.31 to $15.13.
But Dell Computer tumbled $4.25 to $39.81 on worries about narrowing profit margins detailed in the company’s quarterly earnings report on Tuesday. IBM, a recent market leader, slid $2.63 to $235.88.
* Health-maintenance organization shares soared for a second day. The California Public Employees Retirement System on Tuesday said it will sharply boost the rates it pays HMO providers for health-care coverage in 2000.
Cigna jumped $3.88 to $96.50, and Foundation Health rose $1.81 to $18.94.
* Some consumer growth stocks rebounded, led by Johnson & Johnson, up $3 to $93.38, and Clorox, up $3.25 to $109.25.
* Utility stocks surprised analysts with a brisk rally. Duke Energy rose 88 cents to $57, Columbia Gas jumped $2.25 to $52.69 and PECO Energy gained $1.38 to $48.38.
* Among new issues, Nextera Enterprises, a venture backed by former junk bond guru Michael Milken, continued to slide from its debut price of $10 a share on Tuesday. The stock fell 25 cents to $8.69 on Nasdaq. Ticker symbol: NXRA.
The firm offers consulting services and counts clients such as America Online and the U.S. Department of Justice. But Nextera is “an amalgamation of smaller companies, so it will have the challenge of consolidating these disparate companies into a cohesive unit,” said Steven Tuen, research director at IPO Value Monitor.
In foreign trading Tokyo and Hong Kong shares had a tough time in the wake of the Fed’s decision Tuesday. The Nikkei-225 index in Tokyo shed 1.5%; Hong Kong’s Hang Seng index slid 1.8%.
Early today the Nikkei dropped below 16,000 for the first time since March 31. The Bank of Japan, in its monthly economic report, said the economy shows no signs of recovery any time soon, though its slide has stopped for now.
Market Roundup, C8
HMO Spotlight, C13
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Are Utility Stocks Predicting the Fed?
Electric and gas utility stocks have historically had a simple relationship with the bond market and interest rates: When rates are rising, utility stocks tend to fall; when rates are falling, utility stocks tend to rise. The relationship is keyed to utilities’ usually high dividend yields: Because investors generally buy utilities for their yields, rising bond yields mean utility yields also must rise to compete. So the stocks decline until their yields (annual dividend divided by the stock price) become more appealing.
All of which makes the latest rise in the 15-stock Dow Jones utility index intriguing: The index jumped 1.7% to a record high of 324.25 on Wednesday. Yet the Federal Reserve on Tuesday warned that it might raise interest rates in the months ahead. Utility investors, at least, seem to be saying that they don’t believe it. Their buying instead could imply that they think the jump in bond yields this year has been overdone and will soon reverse.
The utilities also could simply be big beneficiaries of some investors’ recent return to “value” stocks. Even so, value investors don’t like to lose money and wouldn’t be buying if they thought the stocks would soon be slammed.
Dow utility index, monthly closes and latest
Wednesday: 324.25
Source: Bridge
