Stock Market Plunges for Fifth Consecutive Session Amid Rate Hike Concerns

Strategic Insights -

The Dow Jones industrial average experienced its steepest drop yet, plummeting 72.27 points to 3,626.75, as the stock market fell for the fifth consecutive session. The falls appear to have originated with the Federal Reserve Board's decision to raise short-term interest rates in February, which has led to a sharp decline in stock prices. Economists argue that long-term interest rates have risen a full percentage point above what can be justified by the surge in economic growth since last fall, suggesting that other factors, such as investors being forced to sell bonds to pay back money, may be driving the market.

Key Takeaways:

  • The Dow Jones industrial average fell 72.27 points, to 3,626.75, its steepest drop yet, following four previous falls since the Federal Reserve Board raised short-term interest rates in March.
  • Blue-chip stocks like General Electric and Exxon fell, as did popular high-technology stocks like DSC Communications and Novell.
  • Long-term interest rates have risen almost three-quarters of a point since the Fed first raised interest rates on February 4, helping to draw people from the stock market.
  • Many economists agree that other factors, such as investors being forced to sell bonds to pay back money, may be driving the market.
  • Individual investors have largely stayed out of the trading fray in recent days, but some traders expect them to join institutional investors in selling.
  • Some Wall Street traders predicted another decline today, when two important Government reports are due to be released.
  • The yield on the benchmark 30-year Government bond, which helps set borrowing costs for large corporations and consumers, twice punched past 7.12 percent, a rate last seen in early February 1993.
  • Elaine M. Garzarelli, a market analyst for Lehman Brothers, revised her computer model to turn less optimistic, citing only six of 14 indicators as optimistic.
  • Concerns about a selloff led some institutional investors to engage in "window dressing," or locking in profits or cutting losses to look attractive in performance figures.

Statistics:

  • The Dow Jones industrial average has fallen nearly 352 points, or about 8.8 percent, since February 4, when the Federal Reserve first raised interest rates.
  • The yield on the benchmark 30-year Government bond has risen almost three-quarters of a point since February 4.
  • The 30-year bond's yield settled yesterday at 7.09 percent, up three basis points, or hundredths of a percentage point, above the previous day's close.
  • Trading volume on the New York Stock Exchange was higher than normal, with 390.5 million shares changing hands.
  • Declining stocks outnumbered advancing stocks on the Big Board by 2,041 to 357.

Sources:

  • The New York Times, February 25, 1994
  • The Wall Street Journal, February 25, 1994
  • Business Week, February 28, 1994