New York — Middle East war jitters combined with rising interest rates and nervous profit taking to set the stock market back last week. The market's decline, represented by a loss for the week of 23.64 points in the Dow Jones industrial average, which closed at 940.10, was its first major setback since the rally began in April. However, many analysts deemed the setback only temporary.
Newton Zinder, analyst with E. F. Hutton, noted, "We've had quite a few one-or-two-day selling squalls, but this is a little more serious. Considering all the bad news that has pounded the market, it's not surprising that we've had a setback. But I don't think its a serious setback; the major trend is still up." In his "worst case" scenario, Mr. Zinder can only foresee the Dow's falling to the 900 level.
Alan Shaw, an analyst with Smith Barney Harris Upham & Co., likewise believes the pullback is only temporary. "The bulls will have a hard time for the next two weeks," he predicts, "but the underlying trend remains up." Mr. Shaw notes that investors have accumulated large profits since the market's rise in April and this feature will act to keep a damper on prices.
The market at first didn't view the warfare in the Middle East with much alarm. Some investors decided it was a good time to buy domestic oil stocks while others pointed out that the price of gold had not soared as it sometimes does when there is a global crisis.
Mr. Shaw says Smith Barney has decided that even if Iraq captures the Iranian oil fields, this is not necessarily negative. "It's possible," he explains, "that production might even increase from the fields. We find it hard to conjecture that anything negative in the Middle East can be related to us except for some shift in power in OPEC, or in Soviet influence."
On the interest-rate front, analysts interpreted the Fed's move to raise the discount rate from 10 percent to 11 percent as merely confirmation of the Fed's steady tightening all week. With the money supply rising faster than the Fed would like, pressure has been on the nation's central banker to tighten rates. As the Fed did just that, the bond market's dropped and interest rates rose. At the end of the week, the prime rate was boosted to 13 percent from 12 1/2 percent by many banks. And, at the end of the week, the Fed reported the money supply ballooned again by $2.5 billion.
The rise in interest rates, says William Sullivan Jr. of the Bank of New York , may be related to some pickup in demand for funds. If that's the case, he concludes, "the markets may be on the verge of another spiral in interest rates." If that happens, says Mr. Shaw, there is the danger that the Fed will cut off the economic recovery before it gets firmly established -- a possibility that Wall Street would have to adjust to.
For the auto industry, any major rise in interest rates could be a staggering blow. Last week, the auto companies reported car sales were down nearly 40 percent in mid-September. Although some of the decline was expected, the drop was sharper than most industry analysts had expected.
In fact, two of the automakers acted to shore up their finances last week. American Motors received a cash infusion from Renault of $300 million to $350 million, which also gave the French auto company just under a 50 percent ownership of the No. 4 auto manufacturer. And General Motors Corporation announced it is negotiating with a German company, IBH Holding, about the sale of its Terex division, which makes heavy duty construction equipment.
In the market last week oil stocks were active. At first, domestic oil companies rose since it was felt they would gain from the Mideast tensions. However, later in the week they fell as investors stayed away from all issues. Other areas under pressure included the computer, high technology, and over-the-counter securities.