Stock Market Plunges
A Wall Street Journal story indicating that the Federal Reserve is favoring a hike of short-term interest rates sent investors scampering for cover Monday, with blue-chip stocks putting in their worst showing in nearly four months.
The Dow Jones Industrial Average sank more than 220 points but recovered some of its losses by day's end. If closed down 146.98 to 8917.64, the first time in two weeks that the Dow closed below 9,000.
"A correction of 5 percent to 10 percent is in the cards and it's going to be an across-the-board decline," Ralph Acampora, head of technical research at Prudential Securities, told CBS MarketWatch. "You had an 1,800-point run-up on the Dow in four months, so any kind of normal correction would be expected.
Longer-term, Acampora is not disheartened by the current state of affairs. "This is part of a long-term bull market and my long-term opinion is still bullish," he said.
"I don't think this market weakness will go away in one day," said Frank Cappiello, president of McCullough Andrews & Cappiello and chairman of Cappiello Funds. "But it's very doubtful that the Fed will raise rates at their May policy meeting.
"The Fed is great at jaw-boning," he said. "If they get the market down another 200 Dow points, they'd be very happy, and I think that's what they want to do. However, I think they'll be very, very reluctant to take away the punch bowl and I don't think President Clinton would like that, either. There's going to be a lot of political pressure on them."
But Cappiello is not letting the bleak environment erode his optimism longer-term. "The bull market is still intact," he said.
"I think we've capped the market here over the short-term until we can get a better sense of the underlying strength of the economy and future trends of interest rates," said Marshall Acuff, equity strategist at Salomon Smith Barney. "The stock market is going to be on hold in the weeks ahead looking very closely at various barometers of business activity.
"There are very few defensive havens in this market because just about everything is priced high," he said. "An area I like looking out over the rest of the year is energy, especially oil service and drilling stocks.
Over the past few weeks, comments by senior Fed officials indicated that the central bank is growing restless with the slowing effect that the Asian crisis is expected to have on U.S. economic growth.
Earlier in the year, Fed chief Alan Greenspan said Asia's slowing effect would make itself evident in the U.S. by late spring.
But with U.S. economic growth barreling along in excess of 3 percent annually, Asia's impact on growth has been less than expected.
Typically, the Fed telegraphs major shifts in interest-rate policy to the financial markets before actually implementing the change.
Monday's Wall Street Journal article left littldoubt about the central bank's sentiment regarding short-term interest rates. The Journal piece said the Fed adopted a bias toward higher interest rates at its last policy-setting meeting on March 31.
The federal funds rate, the Fed's key monetary policy lever, is the rate that commercial banks charge each other for overnight loans. The Fed alters this rate by adjusting the cost and availability of bank reserves. The federal funds rate was last raised on March 25, 199,7 to 5.50 percent from 5.25 percent.
In the bond market, the reaction to the Journal piece was swift, with prices skidding.
In late-New York trading, the 30-year Treasury plummeted 1 25/32, to yield 6.063 percent.
Within the stock market, investors peppered the interest-sensitive financial sector with sharp losses, particularly banking and brokerage groups. Elsewhere, the technology, healthcare, transportation, and retail segments all logged significant setbacks.
The Standard & Poor's 500 Index fell 1.9 percent.
New York Stock Exchange losers trashed winners by a stunning 9 to 1. On the Big Board floor, turnover expanded 7 percent to 667 million shares.
The Nasdaq Composite declined 2.6 percent. Declining issues led advancers by 4 to 1 in the Nasdaq Stock Market, with 65 new highs and 90 new lows. Volume totaled 793 million shares.