Dow Rebounds on Rate Rumors
The Dow industrials jumped 230 points Tuesday as stocks broke out of their three-day slump in a rally fueled by bargain hunting and speculation that the Federal Reserve might cut interest rates to try to reignite the economy.
Though the market finished broadly higher, the whiplash rebound--after three days of heavy losses--underlined the unusual volatility of the last few weeks, which is wearying professional and individual investors alike.
“This rally is not necessarily a sign that the market is off to the moon,” said Stuart Freeman, chief equity strategist at St. Louis brokerage A.G. Edwards & Sons. “We’re going to have to get used to moves 200 or 300 points in either direction.”
Some investment pros see the recent wild swings in stocks as a sign that the market is in the process of bottoming. Extreme price moves often have occurred at the tail ends of major market cycles.
Others caution that stocks will be susceptible to sharp swings for the foreseeable future, while, as Freeman put it, “bulls and bears fight it out over the economy and stock valuations.”
The market surged early Tuesday and held at high levels, then sold off in the final hour, trimming the Dow Jones industrial average’s gain from as much as 375 points. It finished up 230.46 points, or 2.9%, at 8,274.09.
The Nasdaq composite index rallied more strongly, gaining 53.54 points, or 4.4%, to 1,259.55, though it also faded late in the session. The tech-heavy index had fallen 10.3% in the previous four sessions, to a five-year low Monday.
The Standard & Poor’s 500 index gained 24.97 points, or 3%, to 859.57 on Tuesday.
One spark for the rally was a report by brokerage Lehman Bros. predicting that the Federal Reserve will cut its benchmark short-term interest rate to 1% by year’s end, from 1.75% now. Fed policymakers meet Tuesday.
Lehman’s report added to a growing chorus of calls from Wall Street for the Fed to take action to bolster the faltering economic recovery.
But trading volume Tuesday remained well below recent peaks, suggesting a lack of conviction in the rally, some analysts said.
In terms of market breadth, the session was nearly the exact reverse of Monday: Winners outnumbered losers by about 3 to 1 on the New York Stock Exchange and by 12 to 5 on Nasdaq on Tuesday. Those were the same ratios by which losers had topped winners Monday, when the Dow slumped 3.2% and Nasdaq dropped 3.4%.
Wall Street’s recent gyrations suggest that many of the players in the market have very short-term time horizons.
Some analysts blame computer-program traders, hedge funds and “short” sellers for the volatility surge. Computerized trading programs triggered by key indexes’ moves above certain levels accounted for 125 points of the Dow’s late drop Tuesday, for example, according to data firm HL Camp & Co. of Palm Beach, Fla.
Others say that short-term players may add to the market’s velocity but that the main cause of volatility--and quickly fading rallies--is widespread uncertainty among portfolio managers.
Mutual fund managers in particular are leery of making heavy new commitments to stocks, fearing another redemption wave by individual investors, experts say. Investors yanked a record net $50 billion from stock funds in July, according to one estimate.
At the same time, fund managers don’t want to miss out if the market is in fact turning, analysts say. So they may be quicker to join in, albeit with smaller sums, when stocks rally--and quicker to exit as well.
In an indication of how severe the market’s volatility has become, in the three sessions ended Tuesday the Dow swung an average of 4.7% between its low and high each day, according to Ned Davis Research of Venice, Fla. In the last year, by comparison, the average daily swing was 3.4%.
But some analysts say the volatility is good news. “As the market picks up downside speed, high volatility becomes the norm,” said Tim Hayes, equity strategist at Ned Davis. “That’s what you typically see at or near the end of the decline.”
Hayes said the Dow saw a dramatic surge in volatility in the three-day period ended July 24, with an average daily swing of 7.5%--the highest since 1987. After spikes of such magnitude, the Dow has been an average of 24% higher a year later, Hayes said. There were 12 such occurrences since 1950.
Dennis Ferro, chief investment officer at Evergreen Investments in Charlotte, N.C., said the sharp rallies are a sign value shoppers are starting to assert themselves.
“Investors with a strategic view are sensing bargains,” he said, pointing to billionaire Warren Buffett’s recent investments in the natural gas industry and the surge in companies pledging to buy back their own shares.
Among Tuesday’s highlights:
* U.S. blue-chip gainers included GE, up $1.35 to $29.65; J.P. Morgan Chase, up $1.30 to $23.65; and Wal-Mart, up $1.68 to $47.28.
* European and Latin American markets followed Wall Street higher. Key indexes rose 7.1% in Germany, 5.4% in France, 3.4% in Britain and 3.9% in Mexico.
* Fannie Mae fell $1.50 to $71.51 and Freddie Mac lost $1.31 to $59.70 after Goldman Sachs downgraded the mortgage buyers, predicting a slowdown in growth.
Market Roundup, C6-7
