Nasdaq Rallies to Record; Dow Dives
The Nasdaq Stock Market entered the new year on Monday as it had departed the old one, with a technology rally that lifted the Nasdaq composite index to another record despite a horrendous day for bonds and financial services stocks.
The bond market tumbled as traders apparently decided that an interest rate hike by the Federal Reserve’s rate committee at its Feb. 1 meeting is all but inevitable. Interest-rate-sensitive bank, insurance and brokerage stocks followed bond prices lower.
The Nasdaq composite index gained 61.84 points, or 1.5%, to 4,131.15, but the new record came the hard way.
After soaring 123 points at the opening, the market fell sharply for the next two hours to nearly 80 points below Friday’s close. Then it spent the rest of the day rebounding to its latest record, fueled by Internet, semiconductor and telecommunications stocks.
The 202-point, or 5.1%, swing from high point to low is Nasdaq’s biggest ever in point terms, but ranked only 25th in percentage terms.
Other stock market indicators went down and stayed down.
The Dow Jones industrial average dropped 139.61 points, or 1.2%, to 11,357.51, with two financial services stocks accounting for more than half of the damage. American Express tumbled $9 to $157.25 and J.P. Morgan sank $5.19 to $121.44.
The broader Standard & Poor’s 500-stock index fell 14.03 points, or 1%, to 1,455.22. The Russell 2,000 index of smaller stocks slipped 8.33 points, or 1.7%, to 496.42 after posting its first-ever close above 500 on the last day of 1999.
U.S. Treasury bonds suffered their worst drop in five months, with the yield on the benchmark 30-year bond soaring to 6.61%, the highest since September 1997, from 6.48%
Analysts said two main factors contributed to the bond market sell-off: the apparent meekness of the year 2000 computer bug, plus a report Monday that U.S. manufacturing expanded for the 11th straight month in December.
The manufacturing report highlighted the continuing strength of the economy, increasing fears that inflation could rekindle and that the Fed will feel compelled to raise rates preemptively.
“The Fed is probably going to have to step on the brakes a little harder,” said Bruce H. Alston, director of fixed-income strategy for Value Line Asset Management.
The possibility is growing that the Fed will hike the short-term rate it controls by one-half of one percentage point next month, Alston said. Most analysts had earlier been expecting a hike of one-quarter percentage point--or no increase at all.
As for the Y2K bug, the Fed had provided an infusion of cash to cope with any emergencies brought on by the failure of computers to properly recognize the transition from 1999 to 2000. Large institutions, too, had moved some money into Treasury securities in a “flight to quality.”
Given the nearly trouble-free rollover into the new year, the Fed is expected to drain the excess cash out of the system, and investors may sell their extra bonds. Both actions would put upward pressure on interest rates, analysts said.
Monday’s Nasdaq surge underscored the rift between stock market “haves” and “have nots.” Big tech stocks have dominated, and nearly everything else has limped along.
On Monday, losing issues outnumbered gainers by 2 to 1 on the New York Stock Exchange. Even on Nasdaq, decliners edged out advancers by about 22 to 21.
One of Nasdaq’s biggest stars Monday was JDS Uniphase. The maker of fiber-optic equipment surged $26.19, or 16%, to $188 on news of plans for its third 2-for-1 stock split since July. The split takes effect March 10 for shareholders of record March 1.
Other big gainers included CMGI, which invests in and develops Internet firms, up $49.56 to $326.44; semiconductor giant Intel, up $4.69 to $87; and Internet portal Yahoo, up $42.31 to $475.
Intel and three other tech leaders provided just about the only spark for the Dow industrials. IBM jumped $8.13 to $116, Hewlett-Packard rose $3.69 to $117.44 and AT&T; gained $2.56 to $53.38.
When the Nasdaq index fell sharply from its peak Monday, Hugh A. Johnson Jr., chief strategist at First Albany Corp., thought that the bond market’s woes had finally spread to the technology sector. He also figured that money managers who had been reluctant to sell their tech holdings in the fourth quarter of 1999 were finally beginning to take profits.
But the afternoon rebound surprised him.
“I don’t like to say it’s a bubble,” Johnson said of the technology sector, “but common sense would seem to tell you to reduce your [tech] holdings.”
“The techs are in their own world,” said Rao Chalasani, stock strategist for First Union Securities in Chicago. “Whoever is buying the techs have their own metrics. In their metrics, interest rates don’t matter. You just pay up for growth.”
But interest rates do matter to banks and insurers.
Rising interest rates in Germany dragged down financial services stocks Monday, resulting in a 3% drop in the benchmark DAX Xetra index in extremely volatile trading.
Elsewhere in Europe, markets were mixed, with Italian, French and Spanish indexes falling, Swiss and Nordic ones rising. The London stock market was still closed for the holiday weekend.
Latin American stocks fell on concerns that rising U.S. interest rates could cause rates to climb throughout the hemisphere, slowing economic growth and reducing exports to the United States.
The chief indexes of Brazil and Mexico both dipped less than 1%.
Japanese stocks rose in early trading today--the first market day of the new year--largely on relief that major Y2K problems did not materialize.
Among the U.S. highlights:
* Financial sector woes took Citigroup down $2.69 to $53; General Electric, owner of GE Capital, fell $4.75 to $150; Morgan Stanley Dean Witter plunged $7.75 to $135; Charles Schwab dipped $1.25 to $37; and Merrill Lynch sank $2.69 to $80.63.
* Fogdog jumped $5.38 to $14.88, after a J.P. Morgan Securities analyst said he expects the Internet sporting goods retailer’s sales to rise more than fivefold this year.
* VoiceStream Wireless dropped $15.69 to $126.63 after Deutsche Banc Alex. Brown downgraded the provider of cellular service to “buy” from “strong buy,” saying its 590% gain in 1999 made the stock too expensive.
* Motorola rose $1.75 to $149 after Salomon Smith Barney reiterated its “buy” on the chip maker and said the stock could reach $200 in 2000.
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Bloomberg News was used in compiling this report.
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Market Roundup, C11
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* MUTUAL FUND BONANZA: A record number of stock mutual funds surged 100% or more in ’99. A1
