Stocks change little Dow drops 3.37

November 16, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks closed little changed yesterday after the Federal Reserve touched off concern about slower economic growth in 1995 by raising interest rates for a sixth time this year.

But the dollar jumped to a six-week high against the German mark after the Fed's action, and bond prices closed up slightly.

In stocks, declines among telephone, drug and household products companies outweighed gains in tobacco, oil and technology shares.

This year's rate increases "will slow down the economy much more than people think," said Bob Goodman, senior economic adviser at Putnam Investments in Boston, which manages $95 billion. "Earnings expectations will come down" for 1995.

The Dow Jones industrial average dropped 3.37, to 3,826.36, its third decline in four days, wiping out early gains of as much as 26.58. Caterpillar Inc., Procter & Gamble Co. and Texaco Inc. all fell a point or more.

Broader markets followed the same pattern. The Standard & Poor's 500 index fell 1.02, to 465.02, after rising as much as 2.47, and the Nasdaq composite index rose 0.88, to 769.02, after gaining as much as 3.64.

Advancing stocks totaled 1,117 and declining stocks 1,109 on the New York Stock Exchange, where trading swelled to 339.9 million shares from 260.6 million.

Prices rose but then reversed course after the Fed announced a 3/4 -point increase in overnight lending rates, to 5.5 percent, and in the discount rate, to 4.75 percent. Shortly after the rate increase was announced, computer-guided "sell" orders sliced almost 22 points from the Dow industrials.

Most investors expected a smaller rate increase and question whether the Fed is overreacting to concern about inflation, said Arthur Stockton, head of the $1 billion Stockton Capital Management & Trust Inc. in Scottsdale, Ariz. The Fed "unnerved the market" and may be close to tilting the economy toward recession, he said.

The bottom line is that higher rates mean competition for stocks, traders said. "Why be in the stock market if you can lock in nice rates for the time being?" asked Richard Meyer, head of institutional equity trading at Ladenburg, Thalmann & Co.

To be sure, other investors said the Fed showed yesterday it was determined to fight inflation, and that will ultimately help stocks, in part by boosting bonds and the dollar.

Steady for most of the day yesterday, the dollar rose as high as 1.5575 German marks after the Fed acted, its highest level since Oct. 3. It was last quoted at 1.5555 marks, up from 1.5445 marks before the Fed announcement and 1.5447 marks late Monday in New York. The dollar rose to 98.75 yen from 98.32 yen late Monday.

The benchmark 30-year bond rose yesterday as much as 3/4 point, or $7.50 per $1,000 bond, pushing the yield down seven-hundredths of a percentage point, to 8.0 percent, immediately after the central bank announced it had raised rates.

For stocks, yesterday's rate increase will "clear the stage for a nice sustainable rally in the next few days," based on expectations of moderate economic growth, rising corporate profits and the prospect of a more pro-business Congress, not investors' perception of "what the Fed is doing," said Don Hays, director of investment strategy at Wheat First Butcher Singer in Richmond, Va.

Technology shares paced the market's early gains amid confidence that the stocks can withstand rising rates. Hewlett-Packard Co. rose 75 cents, to $98.875, after jumping as much as $2.25, to a 52-week high of $100.375, on expectations for the company's fourth-quarter earnings, scheduled to be reported tomorrow.

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