Bond, Stock Markets Split in Reactions to Fed
The Federal Reserve tightened credit again, but stocks jumped Tuesday as Wall Street chose to view the move as the last interest-rate increase for the time being.
In the bond market, however, Treasury yields rose--signaling that investors there weren’t fully prepared for the central bank’s latest rate hike.
Blue-chip and technology stocks led the market’s advance, with the Dow Jones industrials surging 171.58 points, or 1.6%, to 10,932.33--the highest close since Sept. 13.
The Nasdaq composite index, which has hit new high after new high in recent weeks, continued that streak: It soared 2.3% to a record 3,295.52, despite a late-afternoon outage of the Nasdaq market.
Significantly, the blue-chip Standard & Poor’s 500 index also hit a record high, rising 1.8% to 1,419.83 and surpassing the previous peak of 1,418.78 set July 16.
Winners topped losers by 3 to 2 on the New York Stock Exchange and by 22 to 18 on Nasdaq. Trading volume was a record 1.496 billion shares on Nasdaq--even with the market’s system outage.
Stocks traded higher early Tuesday, then surged in late trading, after the Fed’s midafternoon announcement that it was raising its benchmark short-term interest rate, the federal funds rate, from 5.25% to 5.5%--the third increase since June.
The Dow was up about 90 points when the Fed announcement hit news wires. It quickly padded that gain to 133 points, then just as quickly surrendered all of the day’s advance.
The Dow then regained its footing and resurged in the final hour of trading.
Traders said the dramatic swings were prompted in part by computer-driven program trading, and, initially, by the bond market’s negative reaction, as yields rose.
Treasury bond yields rose across the board: The bellwether 30-year T-bond ended at 6.06%, up from 6.03% on Monday.
Shorter-term yields, which are more sensitive to immediate Fed pressure, rose more sharply. The two-year T-note yield jumped to 5.86% from 5.77% on Monday.
Some bond fund managers keyed off the Fed’s language in its official statement, which cited an economy growing at a pace that could fuel inflation eventually.
“Until [U.S.] growth slows down to the 3% [area], instead of the 4% [area], the Fed is going to be predisposed to raise rates,” said Don Ross, chief investment officer at National City Investment Management in Cleveland, which has $24 billion under management. “That’s why we’re not outrageously bullish on bonds.”
But in the stock market, the prevailing sentiment was that the Fed may be finished raising rates for now--especially with year 2000 computer bug issues likely to worry financial markets through the end of the year.
“The market was prepared” for the rate hike, argued Kevin Logan, chief market economist at Dresdner Kleinwort Benson North America. “A 25 basis-point hike is not going to have a big impact on stocks--not when [corporate] profitability is improving.”
With the technology and financial sectors leading the market in recent weeks, and interest in other stocks beginning to broaden, some analysts said the rally could be looking at a green light with the Fed out of the way.
Others, however, cautioned that the Dow reached its record closing high of 11,326.04 in a rally Aug. 25--just one day after the previous Fed rate hike.
Stocks then went into a steep dive in late August and for much of September, before snapping back in recent weeks.
But with overseas stock markets joining the U.S. rally over the last month, analysts say investors now appear to be betting on strong economic growth worldwide in 2000, without a significant increase in inflation or interest rates.
“If we get through [today] in good form, the market should broaden out and we’ll see it move higher,” said Alan Ackerman, senior vice president at Fahnestock & Co. in New York.
Among Tuesday’s highlights:
* Financial stocks up sharply included Merrill Lynch, up $5.06 to $87.75; Citigroup, up $2.13 to $58; and American International Group, up $5.56 to $109.75.
* In the tech sector, Intel resurged $2.50 to $76.56, Sun Microsystems leaped $7.13 to $126.63 and Novell surged $3.06 to $22.06.
* Internet stocks also were strong. Yahoo rose $7.56 to $212.56, nearing its record high of $244 set earlier this year. Priceline.com jumped $8.81 to $68.75 and America Online rocketed $8.56 to $160, nearing its 1999 peak of $175.50.
Among smaller Net firms, Juniper Networks surged $45 to $328.50 and Ariba gained $6.63 to $216.63.
* Energy stocks rose as crude oil prices continued to march higher. Near-term futures in New York rose 57 cents to $25.70 a barrel, nearly a three-year high.
Exxon gained $1.19 to $79.56, Chevron rose $2.31 to $93.69 and BP Amoco gained $1.56 to $61.06.
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The Fed’s Moves Since 1990
Here are the changes in the federal funds rate since 1990. The fed funds rate is what banks charge one another for short-term loans. It is the main market interest rate influenced by the Fed’s actions in tightening or easing credit in the economy.
Tuesday: 5.5%
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Sources: Bloomberg News, Times research
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Market Roundup, C12
* FED’S MOVE: Main story, A1
