Dow falls 9.5 as rally loses steam


August 24, 1993|By Bloomberg Business News

NEW YORK -- U.S. stocks moved lower yesterday after last week's rally amid scattered concern over interest rates, the high price of shares, overseas markets and government policy toward business, traders and analysts said.

"The market on a short-term basis appears to be overbought," said Benedict Capaldi, managing director at Brandywine Asset Management in Wilmington, Del. "The market is stretched, so it's not surprising you're seeing some reaction," said Mr. Capaldi, who manages about $2 billion.

The Dow Jones industrial average dropped 9.5 points to 3,605.98 after sliding as low as 3,595.60. On Friday, the Dow industrials gained 3.35 to 3,615.48, its fourth consecutive new high.

The Standard & Poor's 500 Index fell 0.93 to 455.23 and the Nasdaq Combined Composite Index dropped 0.1 to 730.86. Drug, telephone and retail stocks pushed the S&P lower.

Declining common stocks led advancing issues by 8-to-7 amid moderate volume of 210.2 million shares.

Investors ran "out of good news with all the indexes hitting new highs" last week, said Nigel Pringle, trader at Kleinwort Benson North America. "People are piling money into mutual funds because there's no return on certificates of deposit, but just because there's nothing else around doesn't mean you should be buying at these levels."

Stocks were also hurt by a small rise in long-term interest rates, which make bonds more attractive investments than stocks.

After falling as low as 6.19 percent yesterday morning, the yield on the Treasury's benchmark 30-year bond rose to 6.22 percent, up 1 basis point, or hundredth of a percentage point, from Friday.

Weak bonds, and "a feeling that business is not being favored by government," damaged stocks yesterday, said Anthony Dwyer, chief investment strategist at Sherwood Securities. Lifting the minimum wage, as proposed by Labor Secretary Robert B. Reich, would "eat into the cost of doing business" for restaurant and supermarket chains, Mr. Dwyer said.

Declines in European stock markets added to the pressure on U.S. shares.

European stock markets fell as prospects faded for fast cuts in short-term interest rates. Germany's DAX index fell 1.79 percent, France's CAC 40 index dropped 0.79 percent and Britain's FT-SE 100 index fell 0.51 percent.

The downward trend in European interest rates "seems to be slowing," said Richard Ciardullo, research director at Eagle Asset Management of St. Petersburg, Fla.

Mr. Capaldi of Brandywine Asset Management said he uses a ratio of 45-day moving averages in the S&P 500 index to measure the medium-term value of the market, and that measure is "as stretched as I've seen since the end of 1991. It's not surprising to me that you're getting some sort of reaction. You've had the market run pretty nicely for six weeks."

Since bottoming at 3,449.93 on July 6, the Dow Industrials have risen about 155 points or 4.5 percent. Over the same period, the yield on the 30-year Treasury bond has fallen from 6.68 percent.

Mr. Capaldi isn't too concerned about stock prices being high, since interest rates are so low. Interest rates can move lower if U.S. inflation drops to about 2 percent, and "are probably OK where they are" if inflation is at about 3 percent, he said.

Inflation in July rose at an annual rate of 2.8 percent, down from this year's peak of 4.3 percent in April.

Except for Philip Morris Cos., Mr. Capaldi has shunned most consumer nondurable stocks because of concerns about slow earnings.

News that Wal-Mart Corp. faces a trial in Arkansas over its pharmacy prescription prices weighed on retail stocks, said Michael Lockwood, head of U.S. trading at S. G. Warburg & Co. Similar suits would be filed against Wal-Mart in other states if the Arkansas suit is successful, the Wall Street Journal said. Wal-Mart shares dropped 25 cents, to $26, and Sears, Roebuck and Co. slipped 12.5 cents, to $53.625.

General Electric Co. dropped 87.5 cents, to $97.75, after rallying 75 cents in the last hour of trading Friday in connection with the expiration of August option and futures contracts, Mr. Lockwood said.

Cracker Barrel Old Country Store Inc. fell 75 cents, to $26.25, after a Greensboro, N.C., newspaper reported an employee who handled food at the company's restaurant there had tested positive for hepatitis A.

A&W Brands Inc. rose $1, to $19.25. Cadbury Schweppes PLC said a report in the Sunday Times of London that it will buy the root beer maker for $226 million was "purely speculative." Cadbury American depositary receipts fell 87.5 cents to $28.875.

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