U.S. stock, bond prices tumble as interest rates rise

WALL STREET

May 14, 1993|By Bloomberg Business News

NEW YORK -- U.S. stocks plunged yesterday as interest rates shot up for a second straight day amid signs the inflation rate was increasing. Bond prices tumbled and gold prices rose sharply.

"Inflation and rising interest rates," said Jack Solomon, market analyst at Bear, Stearns & Co. "That's a bad combination for the market."

The Dow Jones industrial average fell 34.32, to 3,447.99, one day after hitting a record. The average's slump was led by shares of J. P. Morgan & Co. and American Telephone & Telegraph Co.

The decline in stocks occurred as long-term interest rates rose to their highest level since April 7. A rise in interest rates typically DTC hurts stocks because it makes stocks less attractive relative to fixed-income securities, traders said.

Bond yields soared when the Labor Department said consumer prices rose 0.4 percent last month, the biggest increase since January. The report suggests inflation is accelerating as the economy improves. The yield on the benchmark 30-year bond jumped 10 basis points, to 6.95 percent, as its price tumbled about $12.50 per $1,000 valuation.

"It's going to be harder to convince the market that inflation is not a threat," said Robert McGee, chief economist at Tokai Bank. got a big problem for the market here."

The consumer price report follows Wednesday's release of the producer price index, which said prices paid to factories, farmers and other producers rose 0.6 percent last month. The increase was the biggest since October 1990.

Inflation eats away at the value of fixed-rate securities, which in turn hurts stocks as low interest rates are vital if the stock market is to rise further, said Daniel Marciano, senior vice president at Dillon, Read & Co.

Investors have funneled billions of dollars into the stock market in recent months on the perception that interest rates would stay low, he said.

Yesterday, the broader market averages were hammered by the rise in rates. The Standard & Poor's 500-Stock Index declined 5.57, to 439.23. The Nasdaq Combined Composite Index fell 6.05, to 675.64, and the American Stock Exchange Market Value Index lost 0.52, to 427.91.

Trading was active, with about 294 million shares changing hands on the Big Board.

Declining common stocks out numbered advancing issues by about 12-to-5 on the New York Stock Exchange. Shares of electric utilities, telephone and regional banks fell the most. The three stock groups usually slump when interest rates rise.

Utility and telephone stocks carry relatively high dividend yields, so when bond yields rise, the stocks become less attractive. AT&T fell $1.75, to $53.875; BellSouth Corp. declined $1.25, to $51.25; and Consolidated Edison Co. of New York lost $1.875, to $33.875.

Bank stocks often decline when interest rates rise, because higher rates discourage borrowers, making it more difficult for banks to make money. J. P. Morgan declined $1.875, to $66.375; and Wells Fargo & Co. slumped $2.375, to $104.50.

Royal Dutch Petroleum Co., Echo Bay Mines Ltd., Spectrum Information Technologies Inc., Royal Oak Mines Ltd. and Campbell Resources Inc. were the five most actively traded issues on the U.S. Composite.

Shares of gold producers rallied for a fourth straight day as the price of gold surged again. Gold for June delivery settled $7.50 an ounce higher, at $369.30. Echo Bay Mines Ltd. gained 75 cents, to $11.25; and Glamis Gold climbed $1, to $8.625.

HMO America Inc. rallied $7.875 to $35 after United Healthcare Corp. definitively agreed to acquire the second-largest HMO in Chicago for about $417.7 million in stock. United Healthcare was unchanged, at $56.75.

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