Stocks swoon as rates push even higher Dow industrials, once down 140, shed 88 points

What happens now?

One money manager is 'hanging back' poised to buy at lower levels

April 09, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

After a weekend wait, Wall Street's other wingtip dropped yesterday. With a size-12 thud.

Stocks fell sharply, responding to a continued rise in interest rates and a government report last week that showed more job growth across the country.

The Dow Jones industrial average fell by 88.51 points to 5,594.37. Once yesterday, the Dow was down by more than 140 points, but bargain hunters stepped in later and pushed prices back up.

The trip rope that sent the market sprawling was a Labor Department report Friday that said U.S. employers added 140,000 jobs last month. Besides showing a decent employment boost for March, the disclosure ratified an earlier estimate that the economy added more than 600,000 jobs in February, the biggest one-month spurt in 12 years.

"The report this time is not hugely strong in and of itself, but it confirms that the last report was a legitimate one," said David Testa, director of stock investments for T. Rowe Price Associates Inc. in Baltimore.

Financial investors are wary of economic growth because it can ignite inflation and boost interest rates.

Indeed, rates popped Friday and bond prices sank after the Labor Department's jobs report appeared. But stock markets were closed for the Good Friday holiday so stock investors could only wait and worry.

Yesterday, when equity investors finally could execute their "sell" orders, the New York Stock Exchange composite index fell 6.27, to 345.65. The Standard & Poor's 500-stock index dropped 11.62, to 644.24.

The Nasdaq composite index fell 12.55, to 1,105.66, and the American Stock Exchange's market value index fell 6.62, to 570.48.

And interest rates kept on rising. The yield on the Treasury's main 30-year bond, a closely watched gauge, soared to 6.87 percent yesterday from 6.82 percent on Friday. Not long ago, the T-bond's yield was less than 6 percent. Some professional investors believe that the yield will fly past 7 percent and that stock prices could decline further.

"I think there'll be more chances to buy stocks," said Judith A. Jones, who runs the Victory Value Fund and manages about $1 billion for Society Asset Management in Cleveland. "I think the market could correct at least 4 or 5 percent. I'm just hanging back. Time's on my side."

Whatever their prognosis, many analysts think that the market's fate this year will depend on a contest between the negative forces of rising rates and smaller corporate profit increases on one side, and the levitating force of billions of dollars surging into stock mutual funds on the other. The last time interest rates rose sharply, in 1994, corporate earnings rose at a smart pace, too, and continued to pull stock prices upward.

Corporate profit growth "has been in the 15- to 20-percent range virtually three years in a row," said David Orr, chief economist for First Union Corp. in Charlotte, N.C. He's expecting profit growth of 5 percent or less for 1996, which could hurt stock prices.

However, Richard Cripps, chief market analyst for Baltimore investment house Legg Mason, said Wall Street's earnings hopes for 1996's first quarter are relatively modest. Profit reports will start appearing over the next few weeks, "and if they exceed expectations, that will give the market some psychology to expect it for the second quarter, and on we go," he said.

At the same time, mutual-fund investors keep clamoring for stocks. Indeed, mutual-fund giant T. Rowe Price is seeing its annual, tax-induced April cash surge "coming through at least as well as one would have hoped," Mr. Testa said.

"We're managing a buying process, rather than worrying about heading for the hills," he added. The stock decline yesterday "gives us an opportunity to put some money to work."

Many analysts expect the economy to slow later this year, but few expect the Federal Reserve to cut short-term rates again anytime soon.

"It will take at least four months to resolve the question of whether this pickup in the economy is a real, consistent, ongoing thing that will move into 1997," Mr. Orr said. "Our hunch is, no, it's a temporary acceleration that won't carry through."

Pub Date: 4/09/96

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