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Hard fall on Wall Street
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May 14, 1999: 4:59 p.m. ET
Stocks lose heavy ground after CPI report sparks fears of higher interest rates
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NEW YORK (CNNfn) - U.S. stocks suffered heavy losses Friday after a surprisingly strong inflation report triggered a mass exodus from the market amid rising fears that higher interest rates could soon be on the horizon.
The Dow Jones industrial average lost 193.87 points, or 1.75 percent, to 10,913.32 as investors exited the market in droves amid surging bond yields and growing speculation that official interest rates soon could head higher as well. The blue chip index lost 1.07 percent this week, trimming its gain on the year to 18.86 percent.
Losers overwhelmed gainers on the New York Stock Exchange, with 2,410 stocks falling and 662 rising. Trading volume reached 729 million shares.
The Nasdaq Composite followed suit, tumbling 54.14 points, or 2.1 percent, to 2,527.86. The S&P 500 index shed 29.76, or 2.18 percent, to 1,337.80. Despite Friday's meltdown, the Nasdaq rose 0.97 percent this week and is up 15.29 percent for the year. The S&P 500 index eased 0.54 percent this week for a gain for the year of 8.83 percent.
The market melee was caused by the April consumer price index report, which showed an unexpectedly large jump in prices, primarily due to the rising cost of oil around the world. Still, even excluding volatile food and energy prices, the core CPI rose a surprising 0.4 percent in April, twice the increase forecast by analysts.
The news sent the bond market into a free fall, pushing the bellwether 30-year Treasury bond down 2-4/32 points in price, and its yield up to 5.91 percent -- the highest it has been in a year. The bond's losses were further exacerbated by the day's second batch of significant economic data -- a report showing industrial production grew 0.6 percent in April.
The dollar recovered from a morning slump and moved slightly higher against the euro and the yen. The currency had fallen in the morning as the fear of higher interest rates caused a general exit from U.S. financial markets. Longer term, higher interest rates would be supportive for a stronger currency.
Despite the surprisingly strong increase in consumer inflation in April, some analysts interpreted the CPI report as a one-time glitch in an otherwise solid trend of tame inflation. Charles Reinhard of ABN Amro said a jump in tobacco and apparel prices contributed to the overall CPI increase, but he added that the Federal Reserve is unlikely to raise short-term interest rates as a result of just one report.
The Fed's policy-making Federal Open Market Committee is scheduled to meet Tuesday to discuss interest rates.
"This number is a one-month number. I would really be hesitant to make a trend out of this," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson. "If you strip out oil, these numbers do not look so bad and, especially in the producer price area, prices are still falling and this tells me that the pipeline does not have inflation in it."
Financials take a tumble
Although selling in the stock market was broad-based, financial stocks -- which comprise one of the market's most interest rate-sensitive sectors -- tumbled as soon as they opened for trading.
Among the Dow's components, American Express (AXP) lost 4 to 120-3/4, Citigroup (C) shed 2-7/16 to 71, and J.P. Morgan (JPM) fell 5-13/16 to 140-15/16.
Elsewhere in the market, Chase Manhattan (CMB) dropped 5 to 79 and BankAmerica (BAC) was down 2-1/8 to 68-9/16.
Higher interest rates would curtail borrowing and thus would mean less business for financial institutions. A sudden spike in interest rates also could trigger more loan defaults, another risk factor for the financial services business.
Technology stocks followed their financial brethren, hurt by speculation that higher interest rates are likely to further dampen a sector already haunted by inflated valuations.
Among the tech leaders, IBM (IBM) shed 6-3/8 to 239-5/8. The most heavily weighted Dow component climbed more than 20 points Thursday after the company issued a strong growth outlook at an analysts' meeting a day earlier.
Technology giants on the Nasdaq also took a beating, with Microsoft (MSFT) shedding 2-1/4 to 76-7/8, Intel (INTC) losing 2-1/16 to 58, Dell (DELL) falling 2-1/16 to 41-3/16 and Cisco Systems (CSCO) sliding 2-1/4 to 115-7/16.
Still, some stocks benefited from news that could improve business for their companies.
In the Internet niche, shares of @Home (ATHM) gained 13/16 to 150-1/8 on news the company had joined forces with Microsoft to speed up the launch of its high-speed Internet services.
3Com (COMS), climbed 2 to 28-9/16 after a story in Business Week magazine suggested the company once again is perceived to be a likely takeover target.
(Click here for a look at today's CNNfn market movers.)
(Click here for a look at today's CNNfn technology stocks report.)
-- by staff writer Malina Poshtova Zang
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