Tight money and high interest rates -- which wreaked havoc in the nation's stock, commodities and credit markets Monday -- did more damage early today, but the markets rallied in late trading.
The Dow Jones industrial average of 30 stocks fell 6.67 points to close at 972.44, the sixth consecutive day of decline. However, the average was off almost 10 points earlier in the day. On Monday, the Dow average plummeted 16.48 points.
"The worst is behind us," said Marvin Katz of Sanford C. Bernstein & Co., a major brokerage firm that deals primarily with big institutional traders such as pension funds and insurance companies. Katz said that investors now expect higher rates and that even if the prime rate should rise above 20 percent, it should have no further adverse effect on investor psychology.
On Monday, as a result of Federal Reserve moves to restrict the growth of credit and money to fight inflation, the nation's major banks boosted their prime lending rates to 19 percent and interest rates in the open market -- where banks raise much of the funds they then lend to customers -- shot up about a full percentage point as well.
After the markets closed Monday, the Federal Reserve boosted the rate it charges its members banks to borrow from it to a record 14 percent from 13 percent and said it would tack a four-percentage-points surcharge on that rate for banks that borrow frequently. The Fed took the step both to signal its resolve to hold down the growth of money (essentially checking accounts and cash) and to keep banks from going to its borrowing window when money gets expensive.
The money supply, which experts thought would fall last week, instead exploded by $4.2 billion, far in excess of what the Federal Reserve wanted.
Just like the stock market, the bond market started off poorly but recovered later in today's trading. "We began unfriendly but signed a peace treaty around noon," said Andrew Morse, first vice president of the brokerage firm Drexel Burnham Lambert Inc.
Thirty-year Treasury bonds that closed at 90 1/2 Monday (if the bond had a face value of $100, an investor would have a pay $90.50 for it) fell to 89 7/8 this morning, but recovered to close at 91 1/8, Morse said.
It was the same in other markets, as well, analysts. Short-term interest rates did not rise as sharply as on Monday, nor did commodity prices fall as precipitously.
William Byers, director of commodity trading at Bear, Stearns & Co., said that the steep decline in most commodity prices Monday was the result of interest-rate shock. "It was more of the same today, but it was less severe," Byers said.
He said commodity prices get hurt by high interest rates because other investments such as money market mutual funds siphon off investors' funds.
The Dow average, which hit a four-year-high less than two weeks ago, has fallen 51 points since April 27. On the New York Stock Exchange, 49.2 million shares changed hands compared with 40.4 million on Monday.
Standard & Poor's index of 400 industrial stocks fell 0.25 point to 147.86, and S&P's 500-stock composite index declined 0.35 point to 130.32.
The New York Stock Exchange's composite index closed down 0.22 point to 75.30. The NASDAQ composite index for over-the-counter market closed at 211.55, down 1.77 points. On the American Stock Exchange, the index was 349.98, up 0.33 point.