Greenspan Triggers Explosive Day
Chided for their “irrational exuberance” by Alan Greenspan, investors fled the stock market early Friday only to rush back in and snap up the marked-down merchandise, cushioning a steep decline.
The Dow Jones industrial average tumbled 145 points in the first half hour of trading before recovering to close at 6,381.94, down 55.16 for the day and down 139.76 on the week.
Broader measures also erased a big chunk of the early slide, which was preceded by a sharp selloff on foreign markets and a big jump in bond market interest rates, all precipitated jitters from a Thursday night speech by Greenspan, the Federal reserve chairman.
Greenspan hypothesized about the consequences of “a collapsing financial asset bubble,” triggering fears the Fed may soon raise interest rates to slow inflationary pressures in the economy and the financial markets.
Cooler heads prevailed, however, with the help of another report suggesting moderate economic growth. Bond market yields quickly fell and bargain hunters swooped in.
“The market came to the conclusion that this was nothing but an effort by Greenspan to keep the speculation under control, not a harbinger of some Draconian monetary policy in the works,” said John Shaughnessy, research director at Advest Inc. of Hartford, Conn.
Stocks and bonds have been rallying since late summer amid optimism that economic growth has ebbed enough to contain inflation without the central bank’s intervention. The Fed’s policy makers are to meet again Dec. 17. The prospect of higher inflation or interest rates makes fixed-income investments such as bonds less attractive, and higher interest rates can hurt stocks by slowing consumer spending and raising corporate borrowing costs.
As bond prices tumbled in the morning, the yield on the 30-year Treasury bond - a key determinant of corporate and consumer borrowing costs - soared from late Thursday’s 6.50 percent to as high as 6.64 percent, the highest level since early November. Last week, the yield hit a nine-month low amid continuing indications of non-inflationary economic growth.
Bonds and stocks recovered as that scenario was reinforced by Friday morning’s news that job growth slowed in November. As the long-bond recovered, its yield fell to about 6.51 percent.
Declining issues outnumbered advancers by more than a 4-to-1 margin on the New York Stock Exchange.
The Standard & Poor’s 500 list fell 4.78 to 739.60 after rebounding from a 17-1/2-point morning slide. The NYSE composite index fell 2.60 to 390.15 after being down nearly 9 points in the early going.
The Nasdaq composite index fell 12.44 to 1,287.68 after recovering from an early 36-point deficit. The American Stock Exchange’s market value index fell 4.33 to 585.70 after falling more than 12 points earlier.
Overseas, Tokyo’s Nikkei stock average fell 3.2 percent, its worst decline of the year; Frankfurt’s DAX index fell 4.0 percent, and London’s FT-SE 100 fell 2.2 percent.