Bond Yields Slide and Stocks Surge on Fed Rate Hopes
Treasury bond yields plunged Thursday on fresh signs of economic slowing, and that was good enough for stock investors.
The Nasdaq composite index jumped 181.59 points, or 5.3%, to 3,582.50, and the Dow Jones industrial average advanced 129.87 points, or 1.2%, to 10,652.20.
Nasdaq volume, at nearly 1.6 billion shares, heartened some analysts, as winners topped losers by more than 2 to 1. Tech stocks led the rally.
In the Treasury market, yields sank across the spectrum: The 30-year bond fell to a one-month low of 5.95% from 6.01% on Wednesday, the 10-year note fell to 6.20% from 6.29%, and the two-year note slid to 6.60% from 6.68%.
Though equities rallied broadly, battered tech stocks rose the most, with the Interactive Week index of Internet issues up 6.4% and the Philadelphia semiconductor stock index up 6.9%.
Among broader indexes, the blue-chip Standard & Poor’s 500 gained 2%.
The rally preceded the all-important May employment data, due out this morning. If the job numbers are weak and investors again rush into bonds, driving yields lower, it could be a tonic for the stock market, analysts say. In other words, bad news--about the economy--is good news again.
But some analysts wonder how long that sentiment can continue to buoy the stock market if investors also have to fear for corporate earnings in a weaker economy. Indeed, retailers Pacific Sunwear and Abercrombie & Fitch, both already reeling, got clipped anew Thursday on their latest reports of disappointing sales.
DaimlerChrysler slipped 31 cents to $53.63, nearing its 52-week low, also on disappointing sales figures.
Aside from earnings concerns, technical analysts say stock market patterns still look plain ugly.
“Too much damage has been done,” said John R. McGinley Jr., editor of Technical Trends in Wilton, Conn. The Nasdaq composite is still 29% from its March peak, “and a lot of Nasdaq stocks are down much more than that. The advance-decline line [measuring the number of stocks going up versus those going down] is sick.”
He said equity investors buoyed by two days of robust gains this week, including Tuesday’s record Nasdaq romp, could be clinging to false hope for a sustained recovery.
“The bear always hides itself at the beginning, before it becomes painfully obvious he is out in the road ravaging everything,” McGinley said, noting that bear markets have historically averaged a year and a half in duration.
Economists say the recent bond rally indicates how eager investors may be to declare a slowdown that will forestall more interest rate hikes by the Federal Reserve.
“Optimism has outpaced reality,” said Diane Swonk, economist at Bank One. “There has been a sense each time that the next Fed increase may be their last, and I think they’re wrong again.”
Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, agreed: “It’s too early to declare even a partial victory. Investors are so eager to grab hold of any good news, they overreact.”
Indeed, several Fed officials, in separate speeches Thursday, seemed to warn that the central bank isn’t finished raising short-term rates.
“The longer-term trend appears to me . . . to be one where inflation is rising,” Fed Bank of Richmond President Alfred Broaddus said.
“The jury is still out” on whether the Fed has tightened credit enough to slow the economy, Fed Gov. Edward Gramlich said.
Still, Sohn said, “bond valuations look better than they have since 1994, and patient investors who buy Treasuries and high-quality corporates could be rewarded over the next six months or so.”
Among the day’s market highlights:
* Pacific Sunwear sank $3.63 to $12.44, Abercrombie & Fitch slid $1.13 to $8.69 and Gadzooks fell $3.69 to $10.31, as itchy investors focused on reports of “some weakness” in its young men’s and juniors lines during the second half of May, despite year-over-year gains for the full month.
Other retailers rose on brisk sales reports, including AnnTaylor Stores, up $3.56 to $29.56, and Best Buy, up $6.69 to $70.69.
* Elsewhere in the “old economy,” the picture also was mixed. Caterpillar gained $1.50 to $39.75 and J.P. Morgan climbed $3.19 to $131.94, but International Paper eased 81 cents to $34 and Merck lost $2.19 to $72.44.
* Tech winners included Hewlett-Packard, up $14.06 to $134.25, after upbeat projections at an analysts’ meeting; Broadvision, up $7.69 to $43.50; and PMC-Sierra, up $16.75 to $170.
Also, National Semiconductor rose $5.38 to $59.13 after being reiterated a “buy” at Bear Stearns.
InfoSpace rose $6.69 to $50.06 after the provider of Web site content was reiterated a near-term “buy” by influential analyst Henry Blodget at Merrill Lynch.
Brooks Automation surged $12.42 to $52.17 after the maker of factory-automation systems, whose shares traded for more than $91 in early May, was cited by Credit Suisse First Boston as a “great buying opportunity.”
* Among Southland stocks, Gemstar International gained $4.75 to $47.19 after beating quarterly profit targets.
But National RV Holdings of Perris skidded $1.56 to $9.75 after issuing a profit warning.
Foreign markets were mostly higher, with key indexes up 2.2% in Japan, 2.3% in Germany and 3.6% in Mexico.
Market Roundup, C5-6
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Have Yields Peaked?
Investors have been snapping up longer-term Treasury notes and bonds in recent days, locking in yields on a bet that a slowing economy means interest rates in general may be near their peaks. Weekly closes and latest yields on the two-year T-note and 30-year T-bond:
*
30-year T-bond
Thursday: 5.95%
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Two-year T-note
Thursday: 6.60%
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Source: Bloomberg News
