A skittish stock market posted sharp losses Wednesday over fears that interest rates are headed higher and stock buyers will be in even shorter supply.
The Federal Reserve Board`s surprise increase of its discount rate on Tuesday continued to affect the market Wednesday. The Dow Jones industrial average fell 44.99 to 2034.14 Wednesday, on top of a 28.27-point decline Tuesday. The average has lost 99.93 points in the last five sessions.
The latest losses took the market back to its level after Memorial Day, when the Dow closed at 2031.12 May 31.
Traders and investors worried that interest rates may have to go higher to slow the economy the Fed fears is overheating.
And until they see some evidence of stability in the market, which has dropped nearly 75 points in the last two sessions, investors will be scarce, analysts said. That could mean more declines in stock prices.
In the last hour of trading Wednesday, the Dow industrials dropped more than 50 points, putting the New York Stock Exchange ban on computerized program trading into effect for the first time since June 22. Stock prices then recovered somewhat.
Declining issues outnumbered advancers by about 7 to 1 in trading of NYSE-listed stocks.
Big Board volume came to 200.95 million shares, up from 200.71 million Tuesday. However, a quarter of Wednesday`s volume was attributed to dividend capture strategies.
Wednesday`s dismal performance, analysts said, was a continuation of the negative market reaction to the Fed`s decision Tuesday to raise its discount rate by one-half point to 6.5 percent.
Analysts said the severity of the negative reaction occurred not so much because the Fed raised the rate, but because of its timing. Other interest rates have moved up recently and a discount rate increase had long been rumored, to bring it more into line with other short-term rates.
However, by raising this key interest rate, which the Fed charges for loans to financial institutions, the week before the Republican National Convention and during the Fed`s quarterly refunding, Fed Chairman Alan Greenspan sent a strong signal. And stunned the market.
”What jolted people,” said Hugh A. Johnson, market strategist for First Albany Corp., Albany, N.Y., ”is the timing. To do this in the middle of an auction is a pretty brave and risky thing to do.”
He was referring to the once-a-quarter Treasury offering, known as refunding, of new securities to replace those that are maturing.
Monte Gordon, director of research for Dreyfus Corp., called the Fed`s move a ”preemptive strike. You raise rates now so you don`t have to do it later.”
He added, though, that it will take the market a while to assess what this means. Though some stock prices are considerably lower than they were as recently as last week, Gordon said, ”you`re not going to get bargain-hunters in there until you find a bottom.”
Profit-taking and uncertainty over interest rates were blamed for a sharp decline in the dollar on world currency markets. In New York, the dollar closed at 1.9069 West German marks, down from 1.9204 Tuesday. It closed at 133.68 Japanese yen, down from 135.15.
Bond prices also declined. The widely tracked 30-year Treasury bond fell in value to yield 9.36 percent, up from 9.19 percent Tuesday.
Metals stocks retreated amid concerns that rising interest rates could choke the industrial expansion. Aluminum Co. of America fell $2.37, to $49.50; Asarco lost $1.37, to $23.37; Phelps Dodge dropped $1.87, to $37.12; and Reynolds Metals slipped $1.62, to $48.
The market`s worries about the potential impact of higher rates also took its toll on other economically sensitive issues. International Paper declined $1.62, to $43.37; Monsanto dropped $2.50, to $82.50; Westinghouse Electric fell $1.12, to $51.12; Caterpillar was down $2, to $59.25; and Deere retreated $1.50, to $42.62.
Among technology issues, International Business Machines dropped $2.75, to $118.87; Digital Equipment declined $2, to $100.12; Cray Research lost $1.87, to $78.12; Honeywell fell $2.50, to $62.25; Compaq Computer dropped $2, to $65.25; and Motorola lost $1.75, to $43.50.
Airline stocks also were weak. AMR (American) went down $1.75, to $43; Delta Air Lines dropped $1.75, to $46.87; UAL (United) skidded $2.12, to $92.37; and NWA (Northwest) lost $2.75, to $43.62.
Quaker Oats gained $1.87, to $52.50, as Drexel Burnham Lambert reaffirmed a buy recommendation on the stock. Though Quaker has been a target of recent takeover speculation, a Drexel analyst said the stock is
”fundamentally undervalued.”
