A 410-point drop in the Dow over the past three days has fueled speculation that a major equity pullback is at hand
Is it time for investors to start shifting money out of blue-chip equities and into other assets? A nearly 200-point, or 1.5%, drop in the Dow industrials on Thursday certainly had Wall Street thinking. The drop cemented the worst three-day decline in the Dow Jones Industrial Average since February. The biggest moves in bond yields in two years sparked the sell-off in stocks, which accelerated in the final hour of trading after bearish talk from bond guru Bill Gross.
The S&P 500 and Nasdaq index both fell 1.8% Thursday afternoon, extending a two-day decline, as worries about higher interest rates continued and retailers reported mixed May sales figures.
On Thursday, the Dow Jones industrial average fell 198.94 points, or 1.48%, to 13,266.73. The broader S&P 500 index, was down 26.66 points, or 1.76%, at 1,490.72.
The tech-heavy Nasdaq Composite index lost 45.80 points, or 1.77%, to 2,541.38.
Investors dumped stocks as a deep sell-off in government bonds sent yields on 10-year notes above 5% Thursday morning, and up to 5.12% at the close. The yield is at a 10-month high, causing some observers to wonder if signs of inflation are in the air.
Late in the trading day, Bill Gross, head of PIMCO, which controls several of the world's largest bond and commodity funds, reversed his 25-year bullish stance on bonds and predicted the yield on the 10-year Treasury note could rise as high as 6.5% over the next three to five years.
Don Quigley, portfolio manager of the Julius Baer Total Return Bond Fund, viewed the bond sell-off as a combination of investors acting on the breach of the 5% yield level and the "high visibility of some investment banks throwing in the towel" on bets that the Federal Reserve would ease interest rates in the months ahead.
"Why do you want to own a 10-year note at 5% when the Fed funds rate is at 5.25%? The only reason to stay in is if you think interest rates are coming down," Quigley said.
The bearish turn on bonds overshadowed a positive U.S. wholesale trade report for April that showed strong sales and restraineds growth in inventories, as well as 1,000 drop in jobless claims that offered continued proof of a healthy job market.
In the energy markets Thursday, July crude oil futures on the NYMEX finished $1.47 higher at $67.93 a barrel on technical buying aided by shipping disruptions in Oman in the wake of a storm that hit the Persian Gulf this week.
Among stocks in the news on Thursday were retailers reporting May sales figures. Many shares of retailers moved lower, paced by J.C. Penney's (JCP) disappointing sales. The department store reported 2% lower comparable department store sales, vs. its initial guidance that sales would be flat. J.C. Penney says it still expects sales up in the second quarter in the low- to mid-single digits.
But Saks Inc. (SKS) closed 5.8% higher at $20.12 after reporting a 37.5% leap in May same-store sales and 40% higher total sales. Moving major promotional sales to May from June helped boost the company's May revenues and management now expects June same-store sales to be negative.
Wal-Mart Stores (WMT) posted 1.3% higher total same-store sales in May, and 7.7% higher total sales. The retailer expects June same-store sales to be flat to up 2%. Shares fell nearly 2% to $49.76.
Nordstrom, Inc. (JWN) reported a preliminary 6.3% jump in May same-store sales, and 6.1% higher total sales. The shares fell 3% Thursday to $51.47.
Kohl's Corp. (KSS) reported 11% higher same-store sales in May, and 19% higher total sales. The retailer says the rise was driven by broad-based strength in all of its apparel, footwear and home businesses. Shares were off 3.4% at $72.22.
Target Corp. (TGT) reported 5.8% higher May same-store sales, and 10% higher total sales.
Shares of Apple Inc. (AAPL) shot to record highs and closed up 0.35% at $124.07 after a UBS Financial analyst predicted the company could sell 45 million units of its new multifunction mobile phone in 2009 and raised his price target to $160. The iPhone debuts later this month.
ADC Telecommunications (ADCT) reported earnings of 72 cents per share in its second quarter, vs. 19 cents a year ago despite a 2.4% drop in sales.
In a new wrinkle for the future of Dow Jones & Co. (DJ), Brian Tierney, head of Philadelphia Media Holdings, said he's looking at going up against Rupert Murdoch in bidding for the publisher of The Wall Street Journal. Last year, Tierney led a group of investors in acquiring the Philadelphia Inquirer, where he has rankled the newsroom through layoffs and benefit cuts aimed at improving profits. The stock ended 0.3% lower at $60.00.
European stock markets were lower on Thursday after Wednesday's sell-off prompted by a rate hike by the European Central and Morgan Stanley's sell signal on European equities (see BusinessWeek.com, 6/6/07, "Morgan Stanley's 3-Alarm Sell Signal"). In London, the FTSE 100 index was down 0.27% to 6,505.1. Germany's DAX index lost 1.44% to 7,618.61. In Paris, the CAC 40 index moved 1.46% lower to 5,890.49.
Asian markets were mixed. In Japan, the Nikkei index edged up 0.07% to 18,053.38. In Hong Kong, the Hang Seng Index was off 0.09% to 20,800.16. And China's Shanghai Composite jumped 3.03% to 3,890.80.
Treasury prices plunged Thursday in what looked like capitulation selling, according to Standard & Poor's MarketScope. The rout started overnight, fueled by rumors of massive hedge fund position liquidations, which drove the 10-year Treasury note yield above the key 5% level, ending at 5.12%. The 10-year note finished 1-8/32 lower in price at 95-04/32; the 2-year note was off 04/32 to 99-23/32 for a yield of 5.03%; and the 30-year bond was down 2-04/32 at 92-25/32 for a yield of 5.23%.
Also, New Zealand, in a surprise move, raised its key lending rate overnight. The Bank of England left its rate unchanged.
Treasury yields, after drifting at lower levels for six months or more, have risen steadily the past month. This could be a sign global economies growing more than expected, says S&P. Market watchers are waiting to see if equity traders begin to find bond yields attractive.