Like gamblers getting their chips down moments before the roulette ball hits the number, traders Monday sent the Dow Jones industrial average up in the last hour of trading.
On Tuesday, they may find out whether the Federal Reserve will raise short-term interest rates again now or wait until after the November elections. In all likelihood, interest rates will rise at least once more-for the sixth time-this year, but the timing is anybody’s guess.
Some predict the central bank’s policy-making Federal Open Market Committee will raise a key short-term rate by a half percent Tuesday. The rate is 4.75 percent, up from 3 percent in February.
But despite the trading flurry Monday in a market that had see-sawed in a narrow range all day, traders already had pretty well adjusted to an eventual interest rate increase.
Investors “have already priced in some, if not all, of the Fed (rate increase),” said Jim Kenney, head trader at Prudential Securities. “Now we’re going to sit here and wait for them to do something.”
The Dow Jones industrial average rose 17.49 points to 3849.24 after falling the previous four sessions. Volume on the Big Board topped 272 million shares.
Heavy selling in two semiconductor stocks depressed the technology sector and dragged down the Nasdaq index, which closed off 1.83 points at 755.63.
Investors dumped Micron Technology and Texas Instruments after a CS First Boston analyst lowered the investment ratings on the two chipmakers to “hold” from “strong buy,” reportedly on account of pricing pressures in the market for dynamic random access memory chips.
The yield on the benchmark 30-year Treasury bond rose to 7.79 percent.
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Bonds got a boost in early trading from the dollar, which rose against the German mark and Japanese yen. The dollar was last trading at 1.554 marks, up from 1.549 marks, and at 98.85 yen, up from 97.85 yen.
Increasing commodity prices, a declining dollar relative to other currencies and rising long-term interest rates all signal a need for higher short-term interest rates, said Robert McGee, chief economist at Tokai Bank.
If the Fed decides to keep rates steady, however, stocks could rally. “Given how the market got hit last week, I suspect we could get a fairly decent rally, especially in financial shares,” said Geoffrey Brod, a portfolio manager for Aeltus Investment Management, a unit of Aetna Life & Casualty Co.
But the weakness in the general market Monday, where losers outnumbered gainers 11 to 9, left many feeling uneasy.
“Certainly the broad market direction is still down. Frankly, this could be a pretty wild week,” said John H. Shaughnessy, director of research for Advest.
Heartland report: In the coming battle between United Airlines and Southwest Airlines for the shuttle market in California, fares aren’t the only thing going down. Stock prices are, too.
In the last several weeks, Southwest, which trades under the cuddly symbol LUV, has seen its stock price descend until it hit a 52-week low Monday of $22.37 a share. United, which saw its stock trade around the $150 a share mark before the July 12 employee buyout, has watched the price descend since then. United closed Monday at $91.25 a share, only a no-frills lunch from its 52-week low of $88.
Traders are betting neither company will be a winner at first in the battle for California. United will be taking a big chance with its Shuttle, scheduled for takeoff Saturday, entering the field of short hops after specializing in long hauls.
But in about a year, analysts expect one or the other airline to be pulling ahead. And it’s likely that stock will be a winner, too.
– Trigen Energy Corp. of White Plains, N.Y., which beat out Commonwealth Edison for the contract to heat and cool McCormick Place, has declared an initial quarterly dividend of 3 1/2 cents a share payable Oct. 17 to shareholders of record on Sept. 30.
CDs vs. stocks: Investor preference for stocks versus federally insured certificates of deposit has not yet succumbed to higher interest rates, Kathrine Hensel, chief investment strategist for Lehman Brothers, reports.
Despite the well-publicized increases in CD rates, “the flow of funds into equity holdings this year has continued to be greater than additions to CD balances,” she concluded in a recent report. “Short-term CD rates would still need to climb an additional 2 percent .. . before individuals would be likely to stop putting funds in stocks.”
If three-month CD rates hit 7 percent, many investors would switch completely from stocks to CDs with new money available for saving, she said.
“It is probably no coincidence that this interest rate level that would convince individuals to move away from stocks corresponds to a 6.5 percent federal funds rate (up from 4.75 percent), which . . . is also the level where higher interest rates would go beyond, slowing the economy’s growth and capping inflation pressures to actually begin pushing the economy towards recession.”
In other words, if the economy continus to expand and corporate profits remain robust, stocks will attract investor dollars.