Bear run: Stocks dive to 3-month low Interest rates again a worry

financial and oil shares hit hard

Time to switch to bonds?

Program trading pounds Dow down 94 points, to 6,517

April 03, 1997|By BLOOMBERG NEWS

NEW YORK -- U.S. stocks tumbled to three-month lows on continued concern that interest rates may be headed higher. Oil shares such as Exxon Corp. and banks such as J.P. Morgan & Co. led the retreat.

"We expect more rate increases coming around the world," said Thomas Luddy, chief investment officer at $200 billion J.P. Morgan Investment Management. "That's important, because the bull markets in the U.S. and around the world have been fostered by very easy central bank policies. We are moving from a global tail wind to a global head wind."

J.P. Morgan, the nation's 11th-largest money manager, shifted assets out of U.S. stocks and into U.S. bonds this year. U.S. equities will fall during the next 12 to 18 months, Luddy said, while bonds should offer "single-digit" returns.

The Dow Jones industrial average fell 94.04 to 6,517.01 in a seesaw session that triggered New York Stock Exchange limits on computer-guided trading three times. It was the fourth time since trading collars were implemented in 1990 that three curbs were set off in one day. The last time was March 20.

"There's a lot of asset-allocation shifting -- investors selling stocks and buying bonds," said Michael Clark, head trader at Credit Suisse First Boston. "And there's not a lot of conviction to offset all the program trading, what with companies still waiting to report earnings."

Program trades are computer-guided moves involving blocks of at least 15 stocks in and out of the market. Yesterday there were five buy programs and seven sell programs, according to Birinyi Associates.

The 30-stock average has lost 388 points, or 5.6 percent, since the Federal Reserve raised benchmark interest rates March 25 for the first time since February 1995.

The Standard & Poor's 500 index dropped 9.53 to 750.11, led by bank stocks, amid concern that rising rates would make lending money less profitable for banks. The Nasdaq Composite Index fell 15.93 to 1,201, about 13 percent below its Jan. 22 peak.

Maryland stocks fell. Alex. Brown Inc. lost $2 to $41.375 and Lockheed Martin Corp. slid $1.875 to $81.50. On the broad market, the Russell 2,000 index of small capitalization stocks slid 3.09 to 337.79; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq exchanges, plunged 81.74 to 7,140.67; the American Stock Exchange composite index dropped 5.08 to 651.19; and the S&P midcap index lost 1.71 to 249.14.

Factory orders pile up

The market's slide yesterday was, in part, a reaction to a Commerce Department report that said a backlog of orders at U.S. factories is the latest evidence the economy's momentum will carry into spring and that more interest-rate increases are needed to tame inflation pressures.

For the sixth consecutive month, new orders for manufactured goods piled up faster in February than factories could ship completed items to their customers, the Commerce Department said yesterday.

"We have a strong economy and its momentum is going to continue into the spring," said economist Carl Palash of MCM MoneyWatch in New York. "As a result, I see the Fed tightening two more times, on May 20 and July 2."

Building on a strong 2.5 percent gain in January, new orders rose 0.8 percent in February to a seasonally adjusted $325.9 billion, a record high. Shipments rose 0.9 percent to $321.5 billion, the seventh gain in eight months.

Nevertheless, the backlog of unfilled orders rose 0.9 percent to $523.6 billion. That's enough to keep factories busy for 2.94 months at the current pace of shipments, even if no new orders come in.

Commerce said orders for durable goods -- expensive items such as cars and computers intended to last for at least three years -- rose 1.5 percent in February after shooting up 3.8 percent the month before. Nondurable-goods orders edged 0.1 percent higher after a 0.9 percent gain in January, with the greatest strength evident in paper products and chemicals.

On Friday, the Labor Department releases its monthly report on job growth. Past reports showing unexpectedly robust hiring sent the stock and bond markets tumbling.

"The risk is that you get a bad unemployment number on Friday, which just makes things worse," said Michael Molnar, head of Nasdaq trading at Smith Barney.

Some 1,745 stocks fell and 849 rose on the NYSE, where some 483 million shares traded. The three-month daily average is 510 million shares.

Among the biggest bank decliners, J.P. Morgan fell $3 to $96.875; Bank of New York Co. lost $1.50 to $35.50; and Chase Manhattan Corp. fell $3.25 to $92.375.

Oil companies also declined, as the prospect of rising fixed-income yields made the dividends on their stocks look less attractive to investors. Exxon Corp. fell $2.125 to $104.75; Chevron Corp. fell $1.875 to $67; and Mobil Corp. lost $2.125 to $128.875.

Tech stocks also fall

Intel Corp., down $2.3125 to $137; Microsoft Corp., down $1.25 to $92; and Republic Industries Inc., down $3.1875 to $28.50, led the Nasdaq lower.

Several companies' shares plummeted after warning of disappointing profits. Project Software & Development Inc. shares lost more than half, tumbling $15.9375 to $15.3125, after the company said it expects fiscal second-quarter earnings to fall because of slow software sales. The shares are near a two-year low.

FileNet Corp. plunged $4.875 to $11 after the software maker said it expects to report a first-quarter loss because of weak orders.

Apple Computer Inc. shares bucked the downward trend yesterday, rising 50 cents to $18, after Saudi Prince Al-Waleed Bin Talal said he bought more than 5 percent of the money-losing personal computer maker's shares. The stock is down 14 percent this year.

Phar-Mor Inc. and ShopKo Stores Inc. gained after they scrapped the drugstore chain's proposed purchase of ShopKo. Phar-Mor advanced 37.5 cents to $5.375, and ShopKo rose 41.25 cents to $16.50.

Pub Date: 4/03/97

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