The stock market’s current pattern of strength in computer-technology issues and weakness in industrial and financial blue chips continued Wednesday.
The closely watched yield on the benchmark 30-year Treasury bond jumped to 6.14 percent from 6.06 percent Tuesday, spooking stock and bond investors.
Ford Motor decided to postpone its expected multibillion-dollar debt offering for its Ford Motor Credit unit, citing poor market conditions. But the temporary removal of the huge supply of corporate debt failed to offset the prevailing fears that higher interest rates lie ahead.
The Treasury’s monthly auction of $15 billion of two-year notes met weak demand, pushing the yield to a higher-than-expected 5.75 percent, the highest auction yield for two-year notes since September 1997.
The key 30-year Treasury bond yield, which hit 6.16 percent, on June 11, had fallen below 6 percent last week after Federal Reserve Chairman Alan Greenspan hinted broadly he would raise short-term interest rates as a preemptive strike against inflation.
Bond buyers generally applaud inflation fighters, but they are now worried Greenspan might deliver too much of a good thing.
Against the gloomy credit market backdrop, the Dow Jones industrial average fell 54.77 points, to 10,666.86, on moderate New York Stock Exchange volume of 732 million shares.
Banking stocks were especially hard hit on rumors that the Federal Reserve would push its short-term interest rate target up a half percentage point–to 5.25 percent–not the quarter-point boost most analysts expect. J.P. Morgan, one of the 30 Dow stocks, fell $4.37, to $130.62.
The Standard & Poor’s 500 index, which has a greater weighting of computer-technology stocks than the Dow, slipped 2.82, to 1333.06. The Nasdaq composite index added 17.86, to 2598.12, led by gains in Cisco Systems, Dell Computer and Intel. Internet stocks generally rose.
On the downside, computer-networking company 3Com sank $4.37, to $27.12, after the company late Tuesday warned revenues in the second half of the year would fall below year-earlier levels.
The Russell 2000 index of small-company stocks slipped 0.29, to 447.04.
Alfred Kugel, strategist at Chicago-based Stein Roe & Farnham, said the market is in for a few rough weeks before what he expects will be a strong second-quarter profit reporting period.
“We’re at a bad time seasonally,” he said. In addition to profit warnings by some companies in advance of the second quarter’s end, investors are anxious about the Fed’s expected interest-rate boost next week. Kugel noted that it is rare for the Fed to boost interest rates just once.
But that is exactly what the Fed did the last time it raised rates, in March 1997. After holding its short-term target stable for 18 months, the Fed responded to the global financial crisis last fall by cutting rates three times in seven weeks, to the current 4.75 percent.
On the bright side, Kugel forecasts that profits of the S&P 500 companies will be up strongly, 14 percent to 15 percent over 1998’s second quarter, an increase from the first quarter’s 11 percent gain. He expects third-quarter profit gains to top second-quarter increases.
But market sentiment likely will remain bearish until the profit picture clears, he said. “When you’re in this kind of a period, anything that’s surprising and negative will get a reaction,” he said.
Local news: Chicago-based insurer Unitrin rose $2.87, to $37, on news that the stock would be added to the Standard & Poor’s mid-cap 400 index at the close of trading Friday.
Placement in the index will require funds that track the index to buy Unitrin shares.
– General Employment Enterprises, Oakbrook Terrace, expects record revenues for its fiscal third quarter, ending June 30. Herb Imhoff, chief executive officer, credited strength in temporary-help placements as well as higher service fees and the closing of four offices in May and June. Shares gained 69 cents, to $5.50, on the American Stock Exchange.
– Schawk, Des Plaines, which provides printing services for consumer product packaging, warned that second-quarter results would fall below Wall Street estimates. Analysts surveyed by First Call had forecasted the company would earn 22 cents a share, equal to first-quarter results. Instead, the company said earnings per share will come in between 16 and 18 cents, nearly unchanged from a year ago. Chief Executive David Schawk cited delays among customers in changing package designs and general business softness among certain customers. Schawk expects to announce three acquisitions in the next 45 days, building total company revenues to $220 million a year, Schawk said. Shares fell $1.06, to $9.87.
– Shares of Racing Champions, Glen Ellyn, a maker of die-cast model toys, plunged 60 percent, or $10.19, to $6.69, after the company forecast a second-quarter per-share loss of 30 cents to 35 cents and a major revenue shortfall. Analysts were expecting per-share profits of 17 cents. Bob Dods, chief executive, blamed “an overall slowdown in growth of the die-cast category, which resulted from significant emphasis on `Star Wars’ products in the retail marketplace.”
– Merrill Lynch issued a “long-term buy” rating on Chicago-based paper manufacturer Smurfit Stone Container. Shares rose 87 cents, to $21.31.
– Salomon Brothers issued a “buy” recommendation on Abbott Laboratories of North Chicago. Shares rose 31 cents, to $43.81.
– Guardian Life Insurance extended its $25-per-share offer for Chicago-based dental benefits provider First Commonwealth to July 13, saying it needed certain regulatory approvals.
