Stocks Slide Further on Rate Fears
Stocks fell further Thursday, driving the technology-heavy Nasdaq composite index to its longest losing streak since 1994, as comments from two Federal Reserve officials deepened investors’ fears that more interest rate hikes were coming.
But those same comments triggered a Treasury bond rally, pushing long-term yields sharply lower, in a vote of confidence that the central bank was serious about restraining inflation.
In foreign trading, some recently hot emerging markets continued to tumble. The Indian stock market sank nearly 7%.
On Wall Street, the Dow Jones industrial average held modestly above water most of the day, then slid near the close. The index ended down 77.32 points, or 0.7%, at 11,128.29, after diving 214 points Wednesday.
The stock market’s strong rally in recent months was in part rooted in hopes that the Fed was done raising interest rates. Low rates have helped power consumer spending in recent years, with many people tapping the equity in their homes to help pay for big-ticket expenses.
Late last week, stocks began to slide on worries that rates would continue to rise, threatening the economic expansion.
On Wednesday, a higher-than-expected April inflation report added to concerns that the Fed would prolong its nearly 2-year-old campaign of tightening credit, sparking the Dow’s biggest one-day drop since 2003.
Dan McMahon, trading chief at brokerage CIBC World Markets, said it was a bad sign that the market couldn’t rebound after Wednesday’s dive. But he said it was natural that investors would turn skittish at the thought of more rate hikes.
“The oldest mantra in the book is, ‘Don’t fight the Fed,’ ” he said.
After raising its benchmark short-term rate to 5% last week, the Fed indicated that it would take a wait-and-see approach on further changes. But on Thursday, the momentum clearly seemed to shift toward a continued tightening of credit.
Jeffrey Lacker, president of the Fed’s Richmond, Va., bank, told reporters after a speech in Norfolk, Va., that “the inflation outlook right now is at the borderline of acceptable, and perhaps even beyond.”
Also, St. Louis Fed President William Poole said after a speech that inflation risks were “tilted to the upside.”
The stock market viewed those comments as raising the odds that the Fed would lift its rate to 5.25% at policymakers’ next meeting, on June 29.
Losers topped winners by 5 to 3 on the New York Stock Exchange and on Nasdaq.
The Standard & Poor’s 500 index fell 8.51 points, or 0.7%, to 1,261.81.
The Nasdaq lost 15.48 points, or 0.7%, to 2,180.32, its eighth straight decline -- the longest such streak since September 1994.
The Russell 2,000 small-stock index fell for a ninth straight session, losing 1% to 718.47.
As stocks slid, Treasury bonds attracted buyers. The 10-year T-note yield tumbled from 5.15% on Wednesday to 5.06%, the lowest since April 28. Bond yields fall as their prices rise.
Bond investors worry about rising inflation far more than many stock investors, because bonds’ fixed-income payments stand to be eroded by higher inflation. So the Treasury market was heartened that two Fed officials indicated the central bank was concerned about the inflation outlook, said Richard Gilhooly, a bond strategist at brokerage BNP Paribas.
The Fed is showing that “they’re not going to tolerate a thumbs-down on their credibility” in fighting inflation, he said.
Even so, Poole said he wasn’t sure what the Fed would do next with rates. “I have reached no conclusion about the June meeting,” he said.
Although the April inflation report was above expectations, the Conference Board said Thursday that its index of leading economic indicators slipped 0.1% last month, pointing to a weaker economy ahead.
John Bollinger of Bollinger Capital Management in Manhattan Beach said it was too early to say the bull market that began in 2002 was finished. The market, he said, could just be in the throes of a normal correction that could shave 10% to 15% from major market indexes.
Measured from their recent highs, the Dow is down 4.4%; the Russell 2,000 is off 8.1%.
“The Fed will kill this thing,” Bollinger said of the bull market, “but it may take them a long time to do it.”
Among Thursday’s market highlights:
* Industrial stocks fell sharply for a second day on concerns that the Fed might go too far in raising rates and bring on a recession. Deere slid $2.84 to $83.61 and Steel Dynamics dropped $2.25 to $56.48.
* Energy-related stocks were mostly lower even though crude prices rebounded, rising 76 cents to $69.45 a barrel in New York futures trading. Halliburton fell $2.68 to $71.08; Berry Petroleum lost $2.04 to $62.
Also in commodity markets, near-term gold futures sank $10.90 to $679.60 an ounce.
* Many brokerage shares fell on worries about the bull market’s longevity. Goldman Sachs lost $1.18 to $147.03 and Charles Schwab fell 38 cents to $16.64.
* On the plus side, some drug stocks attracted buyers. Merck rallied 79 cents to $35.13.
* Overseas, India’s Bombay 500 index tumbled 6.9%, Russia’s RTS index slid 3.4% and Japan’s Nikkei 225 index dropped 1.4%.
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Reuters was used in compiling this report.
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Begin text of infobox
Global slide
Percentage change:
*--* From Country/index Thurs. high* U.S./Dow industrials -0.7% -4.4% U.S./S&P; 500 -0.7 -4.8 Mexico/IPC -0.2 -7.4 Canada/S&P-TSX; -0.9 -7.6 Germany/DAX +0.2 -7.7 U.S./Nasdaq compos. -0.7 -8.0 U.S./Russell 2,000 -1.0 -8.1 Japan/Nikkei -1.4 -8.4 India/Bombay 500 -6.9 -10.2 Russia/RTS -3.4 -15.6
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*Decline from recent multiyear or record high
Source: Bloomberg News
Los Angeles Times
