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Dow Jones Recoils From Good News More People Have Jobs Now, So Market, In Stunning Leap Of Logic, Falls 171 Points

Sat., March 9, 1996

They’ve got to be kidding.

Wall Street’s brain trust, the loud-tie-and-suspenders crowd that is paid extraordinary sums to make sense of the economy, got some of the best news in years Friday: The nation created a whopping 705,000 jobs last month.

Pop the champagne? Run out and buy that new Mercedes? No way.

Traders instead brandished the topsy-turvy logic that has come to symbolize Wall Street, furiously dumping stocks and bonds. The absurdity was not lost even on those who inhabit that world.

“I’m old-fashioned,” says William LeFevre, senior market analyst at the brokerage firm Ehrenkrantz King Nussbaum Inc. “I say if the economy is improving, then the companies that make up the economy are also improving.”

But in a stunning feat of reasoning, stock traders decided the companies doing all that hiring were actually worth less than the day before. They sold, driving the Dow Jones industrial average, the stock market’s most widely watched index, down 171.24 to 5,470.45 for its third-worst point decline ever.

Traders also dumped Treasury bonds, bills and notes, figuring an improving economy makes investments in Uncle Sam less attractive. It was a tough day for securities widely considered the toast of the globe.

Understanding Wall Street these days is like peeling an onion, with the layers alternating between logic and illogic.

Take the stock market. Traders sold shares Friday on the theory that the fresh signs of economic strength would prompt the Federal Reserve to shy away from further cutting interest rates, which it does to help stimulate growth.

When the economy is doing well or inflation is rising, the Fed leaves rates alone or raises them. Traders figure that hurts companies, who depend on lower rates for cheaper borrowing, which allows them to build new factories, produce more goods - and hire more workers.

Of course, if the economy is stronger and companies are hiring more workers - 705,000, for instance - companies are already doing better and have little need to borrow more cheaply. Their stock, it would seem, should be worth more, not less.

“You can say we’re a bunch of hysterical, manic depressives, and there’s something to be said for that,” says Hugh Johnson, chief investment officer at First Albany Corp., a brokerage firm.

The reality, Johnson explains, is the stock market is a cold-hearted, fickle beast, hoping the economy grows neither too fast nor too slowly.

“It wants things to be just right. This is the world of Goldilocks.” That theory is nothing new. But Friday’s sell-off was one of the sharpest examples of the ghoulish phenomenon that good news is bad and bad news is good.

Last year, for example, the stock market was a rocket, with the Dow industrials blasting through first the 4,000 mark, then the 5,000. Meanwhile, economists and politicians were in a lather over the possibility the economy would drop into recession.

“It is weird,” allows Sung Won Sohn, chief economist at Norwest Corp., a banking company.

Expectations and assumptions are a big part of the picture, he says. For example, the stock market rose to dizzying heights partly on the belief that interest rates would keep coming down.

The market had “built in” steadily lower rates. So whether the economy is going gangbusters almost doesn’t matter. If it seems like the lower rates won’t materialize, Wall Street’s dark side will have its way.

As it turned out, the government’s February jobs report, which caused all the ruckus, was out of whack with the predictions of Wall Street economists. Employment figures are always watched intently, and analysts had estimated February growth at less than half the number of jobs actually tallied, the biggest gain since 1983.

Another irony to come out of Friday’s funk is how the stock market generally feels about jobs: Recently, it hasn’t seen a layoff it didn’t like.

Stephen S. Roach, chief economist at the investment firm Morgan Stanley & Co., notes a divergence between the concerns of Wall Street and Main Street that the sell-off highlighted.

“Hiring raises the possibility that labor costs are going to be higher down the road,” he says, “which is terrific for American workers. But it just says that profit expectations for the stock market, which for years have been based on no hiring and stagnant wages, are changing.”

Wall Street traders, grinding their teeth and wringing their hands, had all day to ponder the possibilities.

Bond prices had their worst day in nearly two decades, with the benchmark 30-year bond off $30.94 for each $1,000 invested. Its yield, which moves in the opposite direction, gained about a quarter percentage point to 6.72 percent.

Bond traders sold for much the same reason stock traders did: interest rates. Lower rates make existing bonds worth more since they pay a fixed rate of return. Concern that rates might not come down hurt.

Ironically, by selling bonds, traders pushed up Treasury yields, to which much borrowing is linked. So concerns about higher rates, in effect, brought on higher rates - without the Fed lifting a finger.


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