Newspaper article St Louis Post-Dispatch (MO)

Dow Index Flirts with Correction

Newspaper article St Louis Post-Dispatch (MO)

Dow Index Flirts with Correction

Article excerpt

The Dow Jones industrial average is about halfway to the 10 percent drop that many have expected for months, and some money managers, analysts and traders believe the other half will come soon.

"There have been a whole series of things that could be the catalyst for that decline," said Gail Dudack, market strategist at S.G. Warburg & Co. "The most obvious one is higher interest rates."

Concern about higher rates has sent the Dow industrials tumbling more than 50 points three times in the past month. The latest drop took place in the first hour of trading Wednesday, when the 30-stock average dropped to 3756.04, or 5.7 percent below the record high of 3985.67 set Jan. 31. On a closing basis, the average has fallen as much as 4.3 percent.

A 10 percent decline in the Dow industrials fits the conventional notion of a market "correction." It's been 3 1/2 years since the last one, the longest stretch ever.

"That's an awfully long time between corrections," said Dirk van Dijk, equity strategist at C.H. Dean & Associates Inc. "Interest rates have been the great prop of the stock market," van Dijk said. If rates rise, he said, "we could end up with a fairly weak stock market."

The yield on the 30-year benchmark Treasury bond stands at 6.78 percent, up more than one percentage point since hitting a low of 5.77 percent on Oct. 15. It peaked Wednesday at 6.92 percent, the highest level since June 1990.

Van Dijk said he believes the Dow industrials could fall to 3650 - not quite 10 percent - over the next month or so, while Dudack and other see the average dropping to 3600. Based on the record close of 3978.36, a 10 percent drop would put the average at 3580.

Wednesday's turnaround in the Dow took place as bond prices recovered from an overnight plunge. "Stocks are being led around by the nose by the bond market," said Grafton Potter, director of research at BancOklahoma Trust Co.

Wednesday's decline reminded investors that stocks are trading at near-historic highs relative to earnings and dividend yields are at an all-time low, said Harold McKinney, chairman of Fleet Investment Advisors Inc.

"The combination means the stock market will likely fall another 5 percent to 10 percent before it stabilizes," he said. …

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