Stocks gain as long-term rates slide


June 26, 1993|By Bloomberg Business News

NEW YORK -- Stocks edged higher yesterday as the long-term bond yield fell to its lowest closing level ever.

The optimism linked to the slide in interest rates was offset by overhanging concern about the strength of second-quarter earnings and the economy, analysts said.

Shaking off a late burst of computer-driven sell orders, the Dow Jones industrial average rose 0.28, to 3,490.89. For the week, the Dow fell 3.88.

Broader market averages gained yesterday. The Standard & Poor's 500-Stock Index rose 0.98, to 447.60, and the Nasdaq Combined Composite Index surged 6.09, or 0.9 percent, to 694.81. Advancing common stocks on the New York Stock Exchange led declining issues by nearly 3-to-2. Trading was lighter than usual, with about 210 million shares changing hands. The American Stock Exchange's Market Value Index slid 0.42, to 430.57.

"The decline in interest rates was the driving force behind the market," said Bill Beise, a partner at Wessels, Arnold & Henderson Inc. "I doubt, however, whether strength in the market will last long," given the lingering economic concern.

The yield on the 30-year Treasury bond fell to a record closing level of 6.7 percent, the lowest close since the Treasury began selling bonds regularly in 1977. The lowest yield ever on the 30-year bond was 6.65 percent, during trading March 8.

The recent decline in interest rates has been fueled by some negative economic reports and expectations that the Federal Reserve is determined to keep interest rates low, assuming that inflation remains low.

"The stock market is looking awfully weary as investors focus on prospects that second-quarter earnings will fall short of expectations," said William Raftery, an analyst at Smith Barney, Harris Upham & Co.

Such big companies as Minnesota Mining & Manufacturing Co., Kmart Corp., Apple Computer Inc., AMR Corp., USAir Group Inc., H.J. Heinz Co. and Hewlett-Packard Co. released discouraging earnings estimates over the past few weeks. Those reports have raised concern that second-quarter earnings will be lower than expected.

Analysts estimate that second-quarter earnings will exceed last year's results by about 20 percent, according to Institutional Brokers Estimate System, a research company that tracks analysts' forecasts. Companies listed on the Standard & Poor's 500 Index are expected to have composite earnings of $6.48 a share, up from $5.40 in the prior year, IBES said.

Those estimates may be too optimistic, judging from early reports from companies like 3M, said John Brooks, director of marketing at the Notley Group. "Earnings expectations are quite high, and I think there is a chance corporate profits won't meet expectations," he said.

The stock market, which rallied in the first quarter, with the Dow gaining 4.06 percent, has faced resistance in the second quarter. This quarter, the Dow is up 1.6 percent.

"The market has been spinning its wheels since March," Mr. Brooks said. "This is a trend that's likely to continue," he said, as concern about the economic recovery and President Clinton's deficit-reduction plan continue to weigh on the market.

3Com rallied $4.75, to $27, after the manufacturer of computer-networking products said fourth-quarter income rose to 40 cents a share, from 19 cents in the prior year. The results matched analysts' estimates, alleviating some investors' concern about the company's profit outlook.

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