Blue-chip cyclical stocks hit the skids Monday as the bond market continued its slump.
The Dow Jones industrial average fell 37.45 points to 3575.80 in moderate trading on the New York Stock Exchange. Broader NYSE indicators also fell. But the Nasdaq composite index held steady, gaining 0.10 to 740.21 on a rebound in technology stocks.
The relatively low trading volume and the lack of breadth beyond the cyclical issues provided some comfort in the worst drop in the Dow industrials since April 2. Nevertheless, a spate of disappointing earnings forecasts in recent days is raising anxieties among traders already worried about higher bond yields.
The 30-year Treasury bond yield rose to 6.10 percent in light trading from 6.04 percent Friday. On Tuesday, the Treasury is set to offer $16 billion of two-year notes. On Wednesday, $11 billion of five-year notes will be sold. The new supply of securities tends to boost yields.
Higher oil prices contributed to the inflation scenario spooking the bond market. OPEC members are to meet in Switzerland Saturday to set production levels with prices near three-year lows.
Regarding earnings news, athletic shoemaker Nike dropped $1.75, to $46.25, after company officials said weak demand likely will cause fiscal 1994 earnings to fall below the ’93 level.
Bond outlook
Mortgage-backed securities have performed poorly this year as homeowners refinanced mortgages at lower interest rates. For that reason, the recent rise in rates is good news to the mortgage-backed market.
John Geissinger, senior vice president and fixed-income portfolio manager for Putnam Investments in Boston, said he has been shifting some assets out of corporate bonds and into mortgage-backed securities and foreign bonds, including country bonds.
(On Monday, a $5.5 billion global bond offering by Portugal was well received by investors, according to Bloomberg Business News. The amount sold was increased from $5 billion.)
In response to the popular question, “Is this the end of the bond rally?” Geissinger said, “I don’t think the bears have arrived and taken over the bulls. I think the bears have showed up, and it’s a fair fight.”
That means the bond market is in for some volatile times but not a collapse. “Economic growth is not fast enough to put inflationary pressures on the system,” Geissinger said. He believes the Clinton tax program will retard economic growth, which is upbeat news for bonds.
Geissinger still likes some high-yield corporate securities, especially new issues by promising young companies, but he agrees that if the bond rally becomes the bond slump, many older high-yield corporate bonds will be hit hard fast.
Local news
– Chicago-based Fruit of the Loom dropped $1.37, to $31.50, after the company announced some new products and pricings in its activewear line. The stock was as low as $30.75 during the day.
Fruit of the Loom read the news as an aggressive long-term strategy to gain market share in the market for knitted shirt “blanks” sold to companies that imprint or emboss the shirts. Some Wall Street analysts read the news as lower prices and therefore possibly weaker earnings in the next quarterly report. These conflicting views of the T-shirt business have been causing gyrations in Fruit of the Loom stock for months.
– Safety-Kleen of Elgin, a provider of oil-recycling and other industrial-environmental services, dropped 25 cents, to $15.62. The company said it was scaling back capital spending by $20 million next year, to $110 million. First Boston removed its “buy” recommendation on the stock.
– Navistar International, the Chicago-based truckmaker, dropped 50 cents, to $20.12, after the company registered to sell 22 million shares of common stock. As previously reported, the company hopes to raise $500 million in the sale, most of which will be used to pay for retiree health-care benefits. The company has about 51 million shares outstanding.
