Federal Reserve Chairman Alan Greenspan did his best to jawbone the markets down in a speech at the Chicago Fed yesterday, but investors mostly shrugged off his negative comments.
The Dow Jones industrial average declined only 8.59 points to close at 10,946.82 after a roller-coaster day when the most-watched market index moved as high as 10,980 and as low as 10,852.
Broader market averages also fell. The S&P 500 dropped 15.26 to 1,332.05, while the technology-laden Nasdaq composite index subtracted 62.17 to 2,472.28. Both indices pared even bigger losses earlier in the day.
Confusion about the market’s direction set in as investors tried to decode Greenspan’s cryptic statements about the health of the U.S. economy and markets.
On the one hand, said Greenspan, “The performance of the American economy over the last seven years has been truly phenomenal.”
That statement was viewed by many as an unusually bullish outlook.
But later in the speech, Greenspan admitted that the economic expansion “has induced a spectacular rise in equity prices that to many has reached well beyond the justifiable.”
In addition, if inflation does accelerate, that would push interest rates up and pressure stock prices, Greenspan said.
“Should equity markets retrench, consumer and business investment demands would, doubtless, weaken considerably,” he said.
There is, however, no evidence that scenario has begun. In fact, retailers just reported that their same-store sales rose 4.4 percent in April, the seventh month in a row that sales beat forecasts.
Retailing stocks accordingly bucked the downward trend. Kmart rose 11/4 to 175/16. Neiman-Marcus advanced 17/16 to 255/8. Payless Shoesource rallied 25/16 to 515/8.
The bond market did not fare so well, especially when Greenspan said low unemployment could lead to higher wages, sparking inflation.
The benchmark 30-year Treasury bond fell 15/32, or $11.56 per $1,000 bond, to 923/8, driving the yield up 9 basis points to 5.79 percent, the highest in 11 months.