Rally Lifts Dow but Not Interest Rate Fears
A late-day rally partly reversed an early sell-off in technology shares Monday but failed to ease fears that an inflation report due out this morning could cause more damage to beleaguered markets.
Wall Street worries that the September consumer prices report, like the wholesale report issued last Friday, will give Federal Reserve Chairman Alan Greenspan more evidence to justify raising short-term interest rates again when the Fed meets Nov. 16.
Bracing for the report, investors pushed bond yields up and sent stocks lower overall. But the Nasdaq composite index cut a 99-point loss in half in the final hour to close down 42.68 points, or 1.6%, at 2,689.15.
The Dow Jones industrial average, meanwhile, rode a late-afternoon surge to close up 96.57 points, or 1%, at 10,116.28. The Dow repeatedly dipped below the 10,000 mark--an important psychological boundary--during the afternoon before finally rallying above it.
Still, falling stocks outnumbered winners by nearly 2 to 1 on the New York Stock Exchange and on Nasdaq. But after last week’s losses--the worst for the Dow in 10 years--some traders were surprised the damage wasn’t worse.
The selling also continued in the bond market, driving yields up across the board. The 30-year Treasury bond ended at 6.32%, up from 6.26% on Friday and matching last Thursday’s two-year high.
The Dow was buoyed by big gains in J.P. Morgan, up $7.31 to $113, and American Express Co., up $2.75 to $137.38. Beaten-down financial shares rallied broadly after leaders such as Morgan and others reported strong earnings.
Another factor in the afternoon rally was a bullish statement from influential Goldman Sachs analyst Abby Joseph Cohen, who said inflation fears are overdone and that the Standard & Poor’s 500 index is actually 5% undervalued, given strong corporate earnings.
Nonetheless, if the September consumer inflation figure comes in much higher than the consensus forecast of a 0.4% increase--0.3% excluding food and energy prices--it could spark another wave of selling in stocks and bonds, analysts said.
Last Friday’s wholesale inflation report for September showed an unexpectedly big 1.1% jump, spooking traders and helping to cause a 266-point Dow plunge.
Markets also were badly rattled after Greenspan’s speech Thursday warning bankers of the collateral losses they might face in connection with a stock market plunge.
Charles Pradilla, strategist at S.G. Cowen, believes that Greenspan is trying to counteract the psychological conditioning investors have received from the decade-long bull market: the conviction that any pause in stocks’ upward march is a signal to buy more.
“He wants people not to buy this dip and be proven right again,” Pradilla argued.
Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser in San Mateo, Calif., believes it will be difficult for stocks to pull off another significant rally soon.
Many of the “props” that have held up the bull market--in particular, low inflation and moderate interest rates--are giving way, Micheletti said. Interest rates have been rising all year, inflation seems to be making a comeback, and if the Fed is successful in slowing an economy it deems overheated, corporate earnings could slump.
Microsoft, the highest-valued company in the U.S. market, reports its earnings after the close of trading today. Considering that Microsoft President Steven Ballmer last month called his own company’s stock overvalued, Micheletti said, the software giant’s profit picture could be disappointing.
Strategist Stanley Nabi of Wood Struthers & Winthrop believes the market is only about halfway through a 15% to 20% pullback in the major indexes.
The Dow now is off 10.7% from its August peak. But many individual stocks have suffered much greater declines.
“It’s not going to be over until the high-profile stocks get taken out some more,” Nabi said.
The highest-profile stocks, of course, are the big tech issues. Though the tech-heavy Nasdaq composite has fallen 7.8% from its record close of 2,915.95 on Oct. 11, it is still up 23% year to date.
On Monday, Microsoft fell as low as $85.06 but ended down just 19 cents at $87.88. Hewlett-Packard fell as low as $75.50 but finished at $78.25, down $4.50.
Still, with influential names such as Intel, Unisys and Lexmark issuing disappointing earnings recently, some analysts argue that it has become harder to justify the tech sector’s high valuations.
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Nasdaq’s Descent
The tech-heavy Nasdaq composite index tumbled again Monday even as the Dow industrials rebounded a bit. Monthly closes, recent peak and Monday’s close for Nasdaq:
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Oct. 11: 2,915.95
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Monday: 2,689.15
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Source: Bloomberg News
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Market Roundup, C14
