Wall Street shook, rattled and rolled Friday as U.S. investors felt the aftershock from a midmorning uptick in short-term interest rates.
Stock prices skidded almost 100 points after Federal Reserve chairman Alan Greenspan stunned the market by saying the Fed was slightly tightening monetary policy in order to support the recovery and stave off inflation.
“It’s really ugly,” said Unterberg Harris head of trading Brian Finnerty shortly before Friday’s closing bell. “It couldn’t have happened at a worse time. No one wants to be a buyer on Friday anyway. I’ve seen all sellers today.”
The heavily cyclical 30-share Dow Jones Industrial Average fell 96.74 points or 2.43% to 3871.42 with notable losses among financial issues and high-flying entertainment stocks.
Blue chip Walt Disney Co. sank $ 1.88 to $ 45 per share and NBC parent General Electric fell $ 3.75 to $ 106.50. Capital Cities/ABC dropped $ 5 to $ 670.25 per share and CBS Inc. lost $ 1.38 to $ 305.13. Carmike Cinemas lost 38 cents to $ 17.50, King World Prods. 25 cents to $ 39.63 and Sony ADRS 50 cents to $ 57.
In the broad market, losers hammered gaining issues by a ratio of more than 6 -to-1, and the Nasdaq composite index tumbled 20.51 points or 2.63% to 777.28.
Yields on three-month Treasury bills rose seven basis points to 3.275%. Long-term rates also gained as the benchmark 30-year bond yield crept up about four basis points to 6.35%.
The central bank’s policy-setting Federal Open Market Committee, which met Thursday and Friday, has never publicly announced its Fed Funds intentions. Shortly before noon, the Fed confirmed a 0.25-point rise in the Fed Funds rate (what banks charge each other for overnight loans) to a perceived 3.25%.
That move helped assuage investors’ worst fears of a half-point increase, although it seemed to some observers a case of shutting the barn door after the bull had already run out.
Still, computer-driven sell programs deepened the slide after midday. Blue chips hit the 50-point loss mark, triggered the New York Stock Exchange’s “circuit-breaker” (a mechanism to limit declines under program trading), paused briefly and then kept heading south.
While economists expected the Fed would soon launch a preemptive strike against inflation, Friday’s move still came as an unpleasant surprise to many who had applauded the Dow’s feverish climb to consecutive record closes in recent weeks.
“It’s probably the first time in a year and a half that the circuit breakers haven’t worked,” said one trader at the Chicago Board Options Exchange. “This has really spooked people.”
Some traders said noted Lehman Bros. strategist Elaine Garzarelli stoked the blaze Friday by predicting stocks could retreat as much as 7% over the next few weeks before recovering and renewing their record-setting pace.
“After all the reaction is over, people are going to say rates are still low and the stock market is the only place to be,” said Chris Willox, vice president at BT Securities.
In the near future, however, look for skittish, volatile activity amid further downside.
“This uptick in short rates lets the air out of the market a little bit,” said Kemper Securities chief market analyst Gregory Nie, who pointed out the Dow’s recent string of record closes marks the longest time span without a major decline this century. “We were overdue for some kind of setback.”
The corrective shift also helps Wall Street make the transition from a liquidity-driven to an earnings-driven market.