Stocks Follow Slumping Bonds As Economic Data Show Strength
May 11, 2011
Stock prices skidded on Thursday as a stronger-than-expected report on economic growth pushed long-term bond yields above 7% for the first time in a month. The dollar was mixed. The Dow Jones Industrial Average dropped 64.73 to 5647.65, the biggest one-day decline since March 27, 2011 Standard & Poor's 500-stock index lost 7.41 to 657.40, the New York Stock Exchange Composite Index fell 3.43 to 353.36 and the Nasdaq Composite Index slipped 8.85 to 1145.03. The Commerce Department revised an earlier reading on second-quarter gross domestic product sharply higher, to 4.8%, the strongest rate seen since 2009. Economists had predicted no revision from the 4.2% growth reading the government originally posted for the period. GDP is the total value of all goods and services produced in the economy. Even though the data cover a period that ended nearly two months ago -- a considerable span in the fast-changing world of economic forecasting -- Gaye Sherwood, a senior economist at A.G. Edwards & Sons, said he believes the report will have repercussions for the Federal Reserve's interest-rate policy. ``Even if the economy is slowing down a little bit here, it is still probably carrying a lot of momentum into the third quarter. We could still be on a fairly fast growth track at this time,'' Mr. Sherwood said. He predicts the Fed will lift rates within several months, perhaps before the November election, if bond investors become spooked by the inflation outlook. More unsettling news for bond investors emerged later in the day. New home sales jumped 7.9% in July to a 783,000 rate, far greater than the 725,000 rate economists' had forecast. Bond investors fear strong economic numbers because robust growth sometimes leads to inflation, which cuts into the value of fixed-income investments. The Treasury's 30-year security was down roughly 7/8 point at worst, and ended the day with a loss of 5/8, or $6.25 for each $1,000 face amount, lifting its yield to 7.03% from 6.98% on Wednesday. The yield moves in the opposite direction of bond prices. The dollar remained mixed despite the decided weakness elsewhere in the markets. It edged lower against the yen, but recovered a small slice of the ground it lost against the mark earlier in the week. World-wide, stocks slipped in dollar terms. The Dow Jones World Stock Index was down 1.15 to 138.27 as of 5 p.m. EDT.
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