Stocks Backtrack From Rally
Stocks turned in a mixed performance Monday after a report showed that the nation’s manufacturing sector was expanding but facing higher costs, triggering worries about inflation and interest rates.
The market rallied as the first trading day of the new quarter began, helped by declining oil prices and a pair of multibillion-dollar acquisitions.
But investors grew more cautious as Treasury bond yields surged. The two-year T-note yield jumped to 4.21%, up from 4.16% on Friday and the highest level in four years.
As recently as Sept. 1 the 2-year T-note was at 3.73%.
The 10-year T-note rose to 4.39% from 4.33% on Friday.
Bonds were reacting to the Institute for Supply Management’s report on September manufacturing activity. The report showed a stronger-than-expected expansion in the sector but also said companies faced sharply higher costs for raw materials.
That fueled fears of upward pressure on overall inflation rates, which in turn could compel the Federal Reserve to continue raising short-term interest rates.
“People are focusing on the fact that with that strength [in manufacturing] you’re going to see continued support for higher rates,” said Caryn Zweig, who helps manage $600 million at Abner, Herrman & Brock Inc. in Jersey City, N.J.
The Dow Jones industrial average, up 40 points in early trading, gave all of that back and more. The index closed down 33.22 points, or 0.3%, at 10,535.48.
The Standard & Poor’s 500 index eased 2.11 points, or 0.2%, to 1,226.70, while the Nasdaq composite gained 3.74 points, or 0.2%, to 2,155.43.
But rising stocks outnumbered losers by modest margins on the New York Stock Exchange and on Nasdaq.
Most major market indexes had posted gains in the third quarter, which ended Friday. The Dow rose 2.9% in the three months; the Nasdaq composite jumped 4.6%.
But year to date, the Dow is down 2.3% and Nasdaq is down 0.9%. The S&P; 500 is up 1.2%.
The average diversified U.S. stock fund is up about 4.8% this year, according to Morningstar Inc.
Many investors have been counting on a strong fourth quarter to lift full-year returns on the major indexes to at least the mid-single digits. The fourth quarter traditionally is a bullish time for equities.
If interest rates continue to rise, however, stocks could face a much tougher time getting a rally going, analysts say.
“I’m usually optimistic, but I think the fourth quarter will be a difficult quarter just based on what the Fed is doing and earnings that will be hurt by the high cost of energy,” said Andrew Seibert, who helps manage $1.2 billion at S&T; Wealth Management in Pittsburgh.
There was some good news Monday on energy prices: Near-term crude oil futures pulled back, falling 77 cents to $65.47 a barrel, the second straight decline.
Gold, which had rocketed in September on inflation jitters, lost $2.90 to $466.10 an ounce.
In other market highlights:
* Phone book publisher R.H. Donnelley announced plans to swallow its larger rival Dex Media in a deal valued at $4.2 billion in cash and stock. Donnelley fell $1.49 to $61.77, and Dex lost 97 cents to $26.82.
In a separate deal, NRG Energy agreed to buy privately held power generator Texas Genco for $4 billion in cash and $1.8 billion in stock. NRG surged $5.95 to $48.55.
* Some energy-related shares continued to rally, even as oil declined. Valero Energy gained $3 to $116.06 and Southwestern Energy soared $8.90 to $82.30.
But Exxon Mobil fell $1.05 to $62.49.
* Some industrial companies lost ground on worries about raw material costs. 3M fell 83 cents to $72.53, Alcoa slid 55 cents to $23.87 and PPG Industries dropped $1.02 to $58.17.
By contrast, investors continued to pile into some providers of materials, particularly in the construction sector. Concrete and gravel producer Florida Rock Industries soared $1.99 to $66.08; Eagle Materials jumped $2.83 to $124.20.
* Ameriprise Financial, the financial advisory firm spun off from American Express, fell on its first day of trading as some investors sold holdings in a company a third as profitable as its former parent. The stock dropped $1.10 to $34.70.
Ameriprise (ticker symbol: AMP) was spun off Friday, with investors getting one share of the new company for every five shares of American Express they held. American Express shares climbed 47 cents to $50.75.
* In the tech sector, Sun Microsystems climbed 26 cents to $4.19. The company announced a news conference today to discuss a collaborative project with Google, which gained $2.22 to $318.68.
* Lennar rose $1.94 to $61.70. The home builder replaced Gillette in the S&P; 500 at the close of trading Monday. Gillette was acquired by Procter & Gamble.
