The Dow Jones industrial average twice pierced the fabled 5000 mark Monday but fell back each time.
The continued selloff of computer-technology stocks and general market malaise about Sunday’s so-called budget compromise left many traders on the sidelines.
The Dow industrials slipped 6.86 points, to 4983.09, on moderate New York Stock Exchange volume of 333 million shares. Broader market indexes also declined as losing issues outnumbered winners by more than 6 to 5 among NYSE-listed stocks and 21 to 17 among Nasdaq-listed stocks.
Many political analysts were looking to Wall Street to validate the significance of Sunday’s continuing-resolution deal between President Clinton and congressional Republicans. Stocks and bonds rallied last week amid general investor enthusiasm that a genuine breakthrough toward a balanced federal budget was at hand. (Friday’s expirations of stock options also fueled buying last week.)
The political pundits were disappointed. Market analysts saw two distinct results of Sunday’s deal: A major deficit reduction was either nearer or further away. And in the background was the looming fear that major deficit-cutting could trip the economy into a recession.
“I had a really blase reaction to the budget developments,” said Dana Johnson, manager of capital markets research at First Chicago. The market has believed all along that the real budget deal won’t be hammered out until later in the year; so, there was little to celebrate Monday, he said.
Johnson believes getting Clinton to agree to a seven-year timetable for a balanced budget and to the more conservative Congressional Budget Office assumptions and projections is an important milestone. But the Republicans caved on several key issues as well, including agreeing to put tax cuts and key spending issues on the negotiating table. No more can House Speaker Newt Gingrich say that he won’t compromise on the Contract With America.
“I think it really looks grim in terms of getting anything meaningful done before the end of the year,” Waldo Best, economist at Barclays de Zoete Wedd Government Securities told Reuters. Global investors seemed to agree as they sold the dollar against major foreign currencies.
In the meantime, the stock market was contending with internal issues that had little to do with federal budget politics. Passing a millennium mark on the Dow industrials can be tough. For example, it took a year between an intraday advance above 4000 and a close above 4000.
Michael Chenery, chief equity trader at Mesirow Financial in Chicago, said the recent rally in stocks has reached a critical stage. “I think the easy part is over,” he said.
Chenery said the weakness in large-capitalization computer-technology stocks such as Nasdaq leaders Microsoft and Intel might have done far more damage to the overall market than it has, were it not for the cohort of Baby Boomers investing anxiously for their retirement years.
But mutual fund managers and other institutional investors are taking profits in technology stocks and rotating into more traditional companies, he said. Picking winners among stocks depends on finding companies with the best earnings prospects.
Jesse Stamer, the primary market maker for the technology index at the Chicago Board Options Exchange, said the movement out of computer-technology stocks has been orderly but persistent, which means the selling may last for a while.
“It appears to me that the big funds are lightening up on their technology load,” he said. The current market trend is a more orderly retreat than sharp selloffs in the sector earlier this year that were painful but short-lived, he said.
The CBOE’s 30-stock technology index dropped 6.43 points, or 3.9 percent, to 159.67. The hot 37-stock Internet index at the American Stock Exchange dropped 6.46 points, or 2.6 percent, to 238.88. And the 16-stock semiconductor index at the Philadelphia Stock Exchange lost 11.41 points, or 5 percent, to 217.78.
After the close, Dell Computer, the largest direct marketer of computer gear, reported slightly better-than-expected fiscal third-quarter results but said shortages of certain components made it difficult to keep up with demand by businesses and individual consumers. Dell said the problem persists in the fourth quarter and will hurt revenues.
The bond market, too, has its own set of worries, related indirectly to budget politics. For one thing, the heavy load of government debt auctions is pushing a great deal of supply onto a market that is at best cautiously optimistic about the near-term outlook for bonds.
Monday’s auction of $18.1 billion of three-year notes brought a lower-than-expected yield of 5.55 percent, but the market sold off after the auction. The yield on the benchmark 30-year Treasury bond inched higher to 6.24 percent from 6.23 percent late Friday. Bond yields move opposite to bond prices.
On Wednesday, the Treasury is scheduled to auction $13.5 billion of 10-year notes. Both auctions were delayed by the budget impasse. Auctions of about $30 billion worth of two- and five-year notes are set for next week.
Incidentally, it’s interesting to see how the gung-ho Republicans, who openly declared they would squeeze their controversial budget priorities through by bringing the nation to the brink of default, now are criticizing Treasury Secretary Robert Rubin for acknowledging their threat and taking actions to avert it.
On the inflation front, the conventional wisdom is that a meeting of OPEC ministers beginning Tuesday in Vienna will not result in any meaningful curtailment of oil supplies. Oil prices have gained in recent days, but analysts do not predict any serious increase in the near term.
Perpetual motion: Veteran stock market observer Bryon Wein at Morgan Stanley has come up with an interesting explanation for the current bull market.
Sure, he notes the downsizing and restructuring of corporate America–including this year’s rush of big-buck strategic mergers–have made stocks attractive to buy. But where’s the money coming from to sustain the buying?
Why, from big-buck mergers. In the first 10 months of the year, corporations announced that $193 billion would be paid to shareholders of companies being acquired.
“Some of this money was paid out to individuals, giving them unexpected liquidity that was, in turn, invested in mutual funds,” Wein wrote in a recent report. “It reassures me that, as long as deal fever persists, corporations will provide individuals with the money at the margin to support the bull market. The cash may yet be there to provide the euphoric finale that this exceptional period deserves.”
This sounds like Wall Street’s version of a perpetual-motion machine.
