The Dow Jones industrial average, struggling to catch up to the record-setting Standard & Poor’s 500 index, posted a solid gain Tuesday, but stocks overall turned in a mixed performance.
A slide in Japanese stocks, sparked by a surprising jump in interest rates in Japan, spooked markets around the world. Europe, preparing to introduce a single currency in January, is hoping for calm financial waters for the launch.
Wall Street was unfazed by the Federal Reserve’s widely expected decision to leave its short-term interest-rate target unchanged at 4.75 percent after Tuesday’s policy meeting. The Fed enacted three cuts in its short-term rate target in seven weeks this fall to help pull global financial markets out of a tailspin.
The Dow Jones industrial average gained 55.61 points, to 9044.46, on moderate New York Stock Exchange volume of 679 million shares.
International Business Machines, Procter & Gamble and Merck led the Dow higher as fund managers with cash on their hands parked it in big-name, highly liquid stocks in advance of year-end reports.
The broader S&P 500 index edged up 0.73, to a second straight record-high close, 1203.57. But losing stocks outnumbered winners by about a 3-2 ratio among NYSE-listed stocks.
After the close of New York trading, S&P announced that the leading Internet service, America Online, was added to the S&P 500 index, replacing Venator, the successor to Woolworth.
America Online, the 52nd-largest company trading on the NYSE ranked by stock market capitalization at the end of November, gained $6.19, to $122.87, a record closing high, during regular trading hours. But shares soared to $138 in after-hours electronic trading, as investors realized that all S&P 500 index funds must now buy AOL.
The Nasdaq composite index eased from Monday’s record-setting performance, despite strong showings by several Internet-rated stocks and by Apple Computer. The Nasdaq index lost 17.05, to 2120.98.
Intel, Microsoft and Cisco Systems slipped, but Apple rose $2.94, to $38, on news of strong sales of its iMac computer. Internet retailer iMall jumped $16.37, to $28.50, on word that AT&T customers would enjoy a discount in shopping through iMall via a service called Stuff.com.
Locally, Elk Grove Village-based uBid, an Internet auction service for computer equipment, skyrocketed $50.37, to a record $134.50. The company went public at $15 on Dec. 4.
The Russell 2000 index of small-company stocks dropped 1.59, to 400.24.
Fed changes: Fed watcher Steven Beckner of the financial newswire Market News Service notes that next month two of the Federal Reserve system’s more hawkish inflation fighters leave the Fed’s key monetary policy committee, which sets the Fed’s interest rate targets.
Jerry Jordan of the Federal Reserve Bank of Cleveland and William Poole of the St. Louis Fed depart. Incoming members include Michael Moskow, president of the Federal Reserve Bank of Chicago.
Whether the changes will produce a more “dovish” Fed remains to be seen, Beckner said. The consensus of economists calls for further Fed rate cuts in 1999.
A major question is whether the Fed will continue to react to financial conditions outside the United States, a rare if not unprecedented event this year, when the Fed and central banks around the world acted to offset a liquidity crisis in global finance.
The stand-pat decision by the Fed on Tuesday came despite gathering evidence that the manufacturing sector of the U.S. economy is slowing sharply. On Tuesday, the National Association of Manufacturers called on Congress to enact a 10 percent income tax cut next year to keep the economy growing.
On the other hand, total economic growth, including the dominant service sector, remains healthy. Moreover, the Fed no doubt is concerned about another wave of what Fed chief Alan Greenspan once called “irrational exuberance” in the stock market, now focused on Internet-related stocks.
Japan raises rates: Bond yields soared in Japan, albeit from historically low levels, after Japanese officials indicated the government and the Bank of Japan would no longer be a principal buyer of long-term Japanese government debt securities.
The 10-year Japanese government bond yield jumped to 1.9 percent from 1.5 percent on Monday and 0.7 percent in October. In reaction, the benchmark Nikkei 225 index of Japanese stocks sank 373.50 points, or 2.6 percent, to 13779.45, on the Tokyo Stock Exchange.
The Japanese government’s policy switch worried some analysts, who noted that Japan plans to issue a vast amount of new debt in 1999 to pay for a fiscal stimulus program intended to pull Japan out of recession. Fears emerged of a new slide in the Japanese economy and Japanese stocks rippling throughout emerging economies in Asia.
“In the short run, this will cause some pain for Japanese banks that have been relying on artificially low interest rates to prop up their balance sheets,” said Peter Jankovskis, director of research for the investment boutique Oak Brook Investments in suburban Oak Brook.
“However, in the long run the move should help the Japanese economy and the world economy, as it signals a move away from the Japanese government’s failed bank-support policy to one geared to boosting consumption,” he said. Many U.S. Japan-watchers have advocated such a switch for more than a year.
The Japanese government bond market will be closed Wednesday for a holiday.
