Wall Street traders thought this morning that Federal Reserve Chairman Alan Greenspan was doing them a favor, but by the time the closing bell rang, they weren't so sure.
The Dow Jones industrial average jumped more than 100 points in the first hour of trading in response to an overnight speech by Greenspan in China. He predicted long-term interest rates will stay where they are for the foreseeable futures -- even though he doesn't understand why they are so low.
Defying conventional wisdom and previous patterns, long-term rates have fallen since the Fed began boosting short-term rates last year. Today they fell again, with yields on 10-year Treasury bonds falling to 3.91 percent -- their lowest level in 14 months.
Low rates generally are good for stocks, because investors would rather take the risk of buying stocks -- particularly ones that pay dividends -- rather than settle for less than 4 percent in bonds.
Low rates are also good for business, because they allow companies to raise capital cheaply.
But as the day unfolded, the enthusiasm over the Fed chairman's remarks was replaced by worries about the economy. It didn't help that Greenspan himself said he doesn't understand why long-term rates are going down when short-term rates are going up, which is not the usual link between the two.
It could be that foreign investors are simply buying so many U.S. government bonds that they are driving up the price and driving down interest rates, he said. It could be that investors are confident that inflation is under control. Or it could be that the economy is weakening -- which is often the reason rates go down.
By the closing bell, only the Dow was still up for the day, closing 16 points higher at 10,483.07. The Standard and Poor's 500 stock index, which was approaching breakeven for the year when rates were climbing this morning, fell a quarter of a point to 1,197.26.
The Nasdaq Stock Market composite index fell almost nine points to 2,067.16. The Nasdaq composite is repeating a pattern investors have seen too many times before -- climbing almost to the 2,100 mark and then falling back. No one can explain why that level represents a barrier to stock prices, but for some reason, the Nasdaq simply can't break through it.
Greenspan's views will get another airing on Thursday when the Fed chairman testifies before Congress. Maybe that will help Wall Street understand better what is happening to rates and what it means for the economy and the market.