Job data spur rush to lock in yields
A U.S. recession? The bond market on Friday seemed to signal that the economic outlook is growing grim. But the stock market isn’t so sure.
A surprise decline in the nation’s payrolls in August triggered heavy buying of Treasury and municipal bonds as some investors rushed to lock in yields -- betting that the Federal Reserve now will have no choice but to slash interest rates.
In the stock market, share prices tumbled as the “R” word figured in a lot of discussions. “Everybody’s talking about the chances of recession,” said Anthony Conroy, head trader at BNY Convergex Group in New York.
Even so, Wall Street’s decline, while ugly, wasn’t as bad as its worst days last month.
The Dow Jones industrial average slumped 249.97 points, or 1.9%, to 13,113.38. By contrast, the Dow had shed 2.1% on Aug. 28. It plunged 2.8% on Aug. 9.
Trading was active Friday, but share volume was about half the levels of last month’s worst days.
Although the employment data were dismal, other recent reports suggest the economy rolled along in August. Major retailers on Thursday reported surprisingly good sales for the month.
David Dreman, a veteran money manager who heads Dreman Value Management in Jersey City, N.J., said he regarded the stock market’s weakness in the last two months as a reaction to worries about a credit crunch, as banks and investors have pulled back from lending.
But stocks aren’t yet signaling that the economy is in great danger, he says.
“It’s not a market crisis, it’s a liquidity crisis,” Dreman said.
The shock over the employment report -- which showed a net drop of 4,000 jobs last month, instead of the 100,000-plus gain that had been expected -- sparked rumors that the Fed would announce an emergency cut in its key short-term interest rate at midday. But the rumors proved false.
Nonetheless, the action in the Treasury bond market showed that many investors believe the Fed now is backed into a corner and must act to slash the cost of money to try to bolster the economy and markets.
The annualized yield on the 10-year Treasury note slid to 4.38%, down from 4.51% on Thursday and the lowest since January 2006. In theory, at least, investors wouldn’t be locking in a 4.38% yield on a 10-year security unless they expected shorter-term rates to fall significantly.
Lou Crandall, an economist at Wrightson ICAP in New York, said the odds were 2 to 1 in favor of a half-point cut in the Fed’s benchmark rate, now 5.25%, when policymakers meet Sept. 18. Until the employment report, most Wall Street players had expected a quarter-point cut.
At brokerage A.G. Edwards in St. Louis, individual investors were calling Friday about buying longer-term corporate and tax-free municipal bonds, said Bill Hornbarger, chief fixed-income strategist at the firm.
Munis are a “great buy” for many investors who are looking to lock in decent yields, he said.
In California, an index of yields on five-year state general obligation bonds fell to 3.75%, down from 3.77% on Thursday and the lowest since May. Because interest on those bonds is exempt from federal and state income taxes, the true yield can be much higher, depending on an investor’s tax bracket.
On Wall Street, broad market indexes fell sharply with the Dow, although they remained above their lows reached in mid-August, when Wall Street was in panic mode over tightening credit conditions.
The Standard & Poor’s 500 index dropped 25 points, or 1.7%, to 1,453.55. The technology-heavy Nasdaq composite gave up 48.62 points, or 1.9%, to 2,565.70.
As with the Dow, declines in most indexes were smaller than what they experienced on the market’s worst days over the last two months. On Aug. 28, for example, the S&P; 500 and the Nasdaq both plunged 2.4%.
Stocks were hammered in August as the housing market’s woes made many banks and investors reluctant to lend money, triggering a widespread credit crunch that has persisted.
But share prices have rebounded from their mid-August lows, helped by faith that the Fed would do whatever was necessary to shore up the financial system and the economy.
The Dow’s lowest closing level in August was 12,845 on Aug. 16, 2% below where it closed Friday.
Many analysts say the market still is thinking that the Fed will be able to erase recession fears by cutting interest rates.
And the employment report “gives the Fed more room to ease,” said Todd Clark, head of trading at Nollenberger Capital Partners in San Francisco.
If investors began to believe that recession was inevitable -- and with it a plunge in corporate earnings -- share prices probably would head far lower than they are now, market pros say.
The S&P; 500 index is down a modest 6.4% from its record high reached July 19, and is up 2.5% year to date.
A genuine bear market, which almost always accompanies a recession, would be expected to drive major indexes down 20% or more.
The question investors will grapple with in coming weeks: Is the economy overall strong enough to sustain corporate earnings growth?
Among the day’s market highlights:
* Harley-Davidson cast some doubts on the earnings picture, saying 2007 results would decline 4% to 6% from last year’s levels. The motorcycle maker said August sales dropped far more than expected. Harley shares plunged $5 to $49.09, a 52-week low.
* Industrial issues, which have been among the strongest stocks this year on optimism about the global economy, gave ground. Caterpillar slid $2.31 to $73.44, Rockwell Automation dropped $2.60 to $68.83 and Eaton lost $3.24 to $91.38.
* Shares of many home builders fell to new multiyear lows. KB Home slid 86 cents to $27.94, Lennar dropped $1 to $26.52 and Pulte lost 58 cents to $15.50.
* Many gold mining stocks gained as near-term gold futures in New York jumped $5.20 to $700.80 an ounce, the highest since May 2006. Gold rallied as the dollar slumped on economic worries. The euro rose to $1.377 from $1.369 on Thursday.
Among gold mining issues, Agnico Eagle rose 96 cents to $49.19 and Barrick Gold added 45 cents to $36.65.
* Falling stocks outnumbered rising issues by more than 3 to 1 on the New York Stock Exchange and on Nasdaq. For the week, the Dow fell 1.8%, the S&P; 500 lost 1.4% and the Nasdaq was off 1.2%.
* Crude oil prices rose for a fifth straight session, adding 40 cents to $76.70 a barrel in New York. The recent peak was $78.21 on July 31.
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