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Market gets Fed therapy
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June 17, 1999: 5:16 p.m. ET
Stocks climb, reassured that while a rate hike is likely, it will be limited
By Staff Writers Malina Poshtova Zang and Robert Scott Martin
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NEW YORK (CNNfn) - U.S. stock markets built on the previous day's rally, climbing Thursday after Federal Reserve Chairman Alan Greenspan gave investors what they saw as reassurance that a rate hike will be a one-time limited event.
The Dow Jones industrial average gained 56.68 points to 10,841.63. On the New York Stock Exchange, advances outpaced declines 1,817 to 1,172 as 701 million shares changed hands.
The Nasdaq composite, featuring many big-name technology stocks, climbed 26.32 points, or 1.1 percent, to 2,544.15. The S&P 500 index rose 9.49 to 1,339.90.
Investors took Greenspan's cautious testimony before a congressional committee as confirmation that the Federal Reserve will raise interest rates when its Open Market Committee next meets June 29-30. However, the Fed chairman said little about what the central bank would do afterward, encouraging speculation, sparked Wednesday by benign consumer inflation report, that the market could see only one rate hike this year.
"This sets the stage for the Federal Reserve to move short-term interest rates higher, if policy makers choose to do so," Abby Joseph Cohen, co-chair of Goldman Sachs' investment committee, wrote in a commentary. "Such a 'flu shot' is now widely expected and would be unlikely to unsettle investors beyond a transitory period."
Bruce Steinberg, chief economist at Merrill Lynch, summed up by saying it now appears the Fed will "certainly" tighten rates, but "one move will be sufficient."
Lehman Brothers economist Joel Kent agreed that investors could see only one rate hike, noting that Greenspan said in follow-up questioning that the current situation will not resemble the multiple rate increases of 1994.
The bond market also rebounded on the hope that a rate hike in June could be the last for a while. The bellwether 30-year Treasury bond rallied 1-10/32 points in price, while the yield dipped to 5.96 percent, falling below 6 percent for the first time in more than a week.
The dollar traded lower against the yen and the euro, getting only a brief boost from a report that the trade gap shrank marginally in April.
Banks edge up, cyclicals ease
In the stock market, shares of financial services companies and other interest-rate sensitive stocks were the most direct beneficiaries of Greenspan's comments and the balanced long-term rate outlook they implied.
Investors overcame early hesitancy to scoop up banking stocks, which have taken a beating in recent weeks as the threat of multiple rate hikes loomed. The finance sector is especially vulnerable to hints of rising interest rates because higher rates make borrowing more difficult, drying up a crucial source of banking revenue.
Among the Dow financials, American Express (AXP) shares climbed 1-3/4 to 125-3/4, J.P. Morgan (JPM) rose 1-11/16 to 134-11/16 and Citigroup (C) finished up 13/16 to 46-15/16.
On the other hand, many cyclical manufacturing stocks, which prosper in the strong economic growth that low interest rates promote, sank as investors took some profits. Dow component International Paper (IP) was a prominent loser, sliding 2-3/16 to 53-5/16, while 3M (MMM) eased 3/16 to 90-5/8.
Techs climb, Internets surge
Investors were less hesitant about padding their portfolios with technology stocks, particularly in the Internet sector.
Greenspan's apparent one-hike cap on rates gave the technology sector a direct boost, said Richard Cripps, Legg Mason's chief market analyst. Like financial shares, technology stocks have been beaten down by rate fears in recent sessions because higher interest rates limit the amount of borrowing that growth-oriented companies like tech-development firms can do for expansion.
Among the richly valued but growth-dependent Internet companies, shares of Net venture capital firm CMGI (CMGI) climbed 3-3/8 to 96-1/2 after BancBoston Robertson Stephens upgraded the stock to "buy" from "attractive."
Cable-Internet provider @Home (ATHM) jumped 3-15/16 to 51-5/16 and America Online (AOL) climbed 4-1/8 to 110-5/8.
News that Compaq (CPQ), the world's No. 2 maker of computers, expects a second-quarter loss added a hint of uncertainty for computer stocks. Although Compaq shares initially plunged, they edged up to close 1/4 higher to 22-1/2.
Other computer stocks had mixed but somewhat guarded reactions to Compaq's woes. Shares of arch-rival Dell Computer (DELL) rose 11/16 to 36-1/2 and Gateway (GTW) climbed 1-5/8 to 67-1/16. The Dow computer makers were lower, however, with IBM (IBM) inching down 1/2 to 120-3/16 while Hewlett Packard (HWP) fell 1-7/16 to 89-5/16.
The world's No. 1 computer chip maker, Intel (INTC), saw its stock shed 1-11/16 to 58 after CS First Boston analyst Charlie Glavin said the company is likely to report second-quarter earnings of 53 cents per share, near the bottom end of forecasts. Glavin also trimmed his full-year earnings estimate for Intel to $2.25 per share from $2.32, blaming both lower prices and slower shipments of microprocessors.
Finally, among the day's outright winners, shares of Neurogen (NRGN), a biotechnology firm, rallied 2-1/16, or more than 16 percent, to 14-5/8. The company licensed its drug discovery technology to pharmaceutical powerhouse Pfizer (PFE). Pfizer's stock rose 1-1/4 to 100-3/8.
(Click here for a look at today's list of CNNfn's market movers.)
(Click here for a look at today's CNNfn technology stocks report.)
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