The stock market closed nearly flat Tuesday as investors seemed transfixed by positive data on inflation, coupled with the likelihood that the Federal Reserve will boost interest rates again, probably in January.
The Dow Jones industrial average slipped 3.03 points to 3715.34, but the Nasdaq index rose 0.37 point to 719.49.
Yields on government bonds closed with the narrowest spreads between short- and long-term maturities in 4 1/2 years, indicating that traders expect inflation to remain subdued. Two-year Treasuries, for example, closed with a 7.68 percent yield, while the benchmark 30-year Treasury bond ended at 7.85 percent, down from Monday’s 7.92 percent. Bond yields move opposite to prices.
“Inflation expectations are being lowered,” said Tony Crescenzi, a trader at Miller, Tabak, Hirsch & Co.
The Federal Reserve, Crescenzi said, is “doing a great job’ of raising interest rates to hold down inflation, which erodes the value of fixed-income securities such as bonds. The Fed has raised the federal funds rate, which banks charge on overnight loans, six times since February, to 5.5 percent from 3 percent.
The Labor Department’s report on producer prices indicated that the Fed succeeded in November. That inflation indicator rose 0.5 percent, but eliminating the volatile food and energy sectors, the increase was a mere 0.1 percent.
Why, then, isn’t the stock market acting stronger?
Traditionally, stocks should be heading south after this much of a boost in interest rates. Seen in that light, the market averages are holding up, though few stock-fund managers have anything to brag about for 1994.
A sure annual gain of 7.68 percent for two-year Treasuries looks attractive, unless you believe that the Fed will succeed not only in taming inflation but also in keeping strong economic growth alive. While the numbers indicate that’s exactly what is happening, there is no guarantee such a contradictory state of affairs will last.
There may be other explanations of recent market activity, including the truth that many investors are booking tax write-offs in December by selling losers. But skepticism that the Fed can bring off a so-called soft landing in economic growth, coupled with high bond prices, goes a long way to describe the last several months of stock activity.
There are some winners in times of rising interest rates. Banks get to charge higher interest rates, as anyone with a variable-rate loan is keenly aware. Since Nov. 22 Standard & Poor’s index of 21 regional bank stocks has climbed 3.4 percent, while its index of seven money-center banks advanced 4.7 percent.
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“The realities of that group are that their earnings and financial conditions have been improving,” said Thom Brown, money manager for Rutherford, Brown & Catherwood in Philadelphia. “A few years ago most banks were plagued with a residual portfolio of bad loans, so banks’ earnings were being hit all the time by write-offs of questionable loans. That’s pretty much worked its way through the system.”
Several bank stocks posted large gains Tuesday: First Chicago rose $1.12, to $46.75; Bankers Trust New York gained $1.75, to $58.87; NationsBank climbed $1.12, to $46.25; and Mellon added $1, to $31.75.
Heartland report: Even amid a strong Christmas season, Spiegel stock fell about 13 percent Tuesday after the retailer said it expects disappointing fourth-quarter results. The stock fell $1.56 to close at $9.87 on heavy volume of 1.6 million shares.
On Monday Spiegel said it had been hurt by unseasonably warm weather and more competition, with the mild fall especially hitting its Eddie Bauer division, which specializes in winter clothing. But the Downers Grove-based company has other problems.
Thomas Tashjian, an analyst with First Manhattan, said catalogers such as Spiegel will be hurt by higher postal rates and paper costs next year. “The company’s cost of prospecting (for new customers) in advance of a postal-rate increase is not yielding much in the way of new names,” Tashjian said.
Stone Container of Chicago got a ratings upgrade to “attractive” from Bear Stearns & Co.’s Linda Lieberman. She cited rolling price increases in the linerboard, pulp and newsprint sectors. Prices have gone up substantially this year and are slated for more increases early next year.
Lieberman raised her fourth-quarter earnings estimate to 15 cents a share from her previous projection of break-even and increased her 1995 outlook to $2.70 a share from $1. Her 1996 estimate is $4 a share.
Stone’s stock price has dropped 25 percent from its 52-week high, she said, making it attractive.
Tenneco of Houston, which owns Lincolnshire-based Tenneco Automotive and Evanston-based Packaging Corp. of America and retains a large stake in Racine, Wis.-based Case, announced plans to buy back up to 7.2 percent of its stock, or about $500 million worth. Tenneco closed up 75 cents, at $39.25.
Oops. In Tuesday’s column, we erroneously reported Lisle-based Tellabs’ 1993 earnings at $1.45 a share, compared with expected earnings this year of $1.50. Actually, Tellabs stock split last year, so the company earned 72 cents a share in 1993 on a post-split basis, making the expected earnings gain this year far more dramatic.