The stock and bond markets followed different drummers Monday, but the result was a profitable trek for investors in both.
The Dow Jones industrial average added 32.16 points, to a record close of 4476.55, on New York Stock Exchange volume of 337 million shares. Broader market indicators also rose as advancing issues more than doubled decliners among NYSE-listed stocks.
On the Nasdaq market, the proposed $3.3 billion buyout of Lotus Development by International Business Machines helped push the Nasdaq composite index up 9.88 points, or more than 1 percent, to a record close of 882.85.
Wall Street loves big-ticket merger deals. They throw off a lot of money, and they indicate that presumably smart business executives are optimistic enough to take giant steps in business strategy.
Bond traders, on the other hand, are using the “R” word-“recession”-more glibly now than any time this year. Friday’s report that the economy lost 101,000 jobs in May, compared with estimates of at least a 150,000 increase, shocked some economists and market forecasters into believing that the nation’s output of goods and services will decline this summer.
The yield on the benchmark 30-year Treasury bond slipped to 6.51 percent from 6.53 percent Friday. The yield on 10-year Treasury notes was 6.06 percent, down from 6.07 percent Friday and barely above the 6 percent target rate on overnight interbank loans called federal funds. The numbers mean that the bond market expects the Federal Reserve to lower the fed funds rate soon in response to the economic slowdown.
What’s going on?
In a word, productivity. The massive job cuts by major corporations that began in the late 1980s continue unimpeded. Exhibit A is Seattle-based Boeing, which on Monday issued a bullish forecast for aircraft orders but said it doesn’t plan to hire any workers to fill them. Indeed, Boeing has announced nearly 40,000 job cuts in the last two years. In active trading Monday, Boeing shares gained $2.62, to $61.62, a 52-week closing high.
Commenting on last week’s Labor Department jobs report, economist Nancy Kimelman of Technical Data said: “The broad softness (in jobs) indicates to me that there is a structural shift in the economy, where capital has the upper hand. The economy is now being driven by capital; labor is considered to be an expense. Companies are replacing people with machines.”
Thomas Paprocki, chief bond trader at Robert W. Baird & Co. in Milwaukee, put it this way: “Just-in-time inventory management has spread to just-in-time personnel management.”
While the trend is nothing new, the intensity of job-cutting is severe at many companies, in part because corporate managers see no cost in it and Wall Street does nothing but applaud. Two reports out Monday indicated that salary increases are at historically low levels, again because there’s no pressure for them to be higher in the midst of corporate cutbacks.
From the standpoint of equity investments, productivity is the ultimate good news. Roger DeBard, general partner of top-rated mutual fund group Hotchkis and Wiley in Los Angeles, said downsizing is now ingrained in many companies’ corporate cultures.
As a result of labor savings, companies are piling up cash, DeBard said. The current low level of dividend yield among major companies-often considered a red flag that stock prices are excessive-masks the fact that corporate America’s capacity to pay dividends-if not its willingness-is robust, he said.
Companies are using their earnings for other purposes-to build cash reserves, for expansion or buying back their stock, he said.
On the other hand, readings from the consumer sector-such as auto sales and confidence surveys, as well as the latest jobs data, are telling the bond market that the much-heralded soft landing in the economy will instead be bumpy.
James Bianco, bond market analyst at Arbor Trading Group in Barrington, said he rarely sees such a wide divergence in attitudes toward the economy-the optimism of equity investors and the pessimism of bond investors.
“We have overvalued markets saying exactly the opposite things,” he said. Who’s right?
In both cases, a fair amount of speculative fever has hit the markets, but historically the stock market tends to be a better predictor of economy trends than the bond market, Bianco said.
As far as the bond market is concerned, traders are betting on short-term price gains amid an emotional rally, he said. Few fixed-income investors are buying to capture today’s lower yields. That means the bond market could reverse course quickly if economic reports don’t continue to validate the recession theory and if the Federal Reserve does not lower short-term interest rates in July.
Among stocks in the news, Cirrus Logic, a maker of printed circuit boards for the computer industry, gained $1.37, to $55.25, after the company announced plans for a two-for-one stock split. Locally, M-Wave of Bensenville, which also makes high-technology circuit boards, added $1.50, to $16.25.
Kmart gained $1.37, to $14, after the company chose a top executive of rival Target Stores to be its chairman.
Pharmaceutical giant Merck gained $1.75, to $49.25, on speculation that the Food and Drug Administration by the end of the year will approve its drug Fosamex for treating osteoporosis.
Bank stocks are thriving in the declining interest-rate environment as they keep their prime lending rate steady at 9 percent. J.P. Morgan, parent of New York-based bank Morgan Guaranty Trust, rose $1.75, to a 52-week closing high of $74.12, after a favorable recommendation by Bear Stearns.
