Market Roars Back; Rally Sends Dow Up 21 to a Record High
After a two-day breather, the stock market resumed its 1985 rally Wednesday with a broad surge that took the Dow Jones industrial index up 21.31 points to a record 1,297.92 and set records in several broader market indicators.
Analysts attributed the rise to investors’ assumptions that interest rates will continue to decline and that inflation will remain low. Among the gainers in Wednesday’s rally were stocks of financial institutions, including insurance companies and brokerage houses whose performance is fueled by lower rates.
“We’re heavily in financial stocks, and aren’t they marvelous,” said Lewis R. Kleinrock, president and chief executive of Independence Investment Associates, a Boston-based manager of $1.7 billion in corporate pension assets.
Investors noted that the market’s performance Wednesday--and all year, for that matter--has come despite expectations that corporate earnings will remain flat or rise no more than 5% to 10% in 1985. But a further decline in interest rates will make owning stocks more desirable than owning bonds, a situation that will spring loose more cash from investors to finance stock purchases. If the interest-rate decline persists, analysts reason, corporate earnings will ultimately improve anyway.
Rally Surprises Many
The strength of Wednesday’s rally, which intensified in the final hour of trading on the New York Stock Exchange, surprised many market observers. Some had expected the Dow to languish further after Monday’s 13.91-point decline and Tuesday’s gain of only 0.55. The market on those days was responding to some bad news at such important companies as International Business Machines Corp., which forecast potentially flat first-quarter earnings; Eastman Kodak Corp., which disclosed poor fourth-quarter results, and Data General Corp., which said this quarter’s earnings will be disappointing.
“Those haven’t been able to take the market down,” remarked Timothy Lyons, senior securities trader at Pacific Century Group, a money-management arm of Los Angeles-based Security Pacific National Bank, after Wednesday’s close. Lyons said Pacific Century’s holdings are virtually 100% in equities.
The Dow industrial index surpassed the psychologically important 1,300 level briefly Wednesday for the second day this year before settling back--though still breaking the record close of 1,292.62 set Jan. 29.
Indicators Set Marks
As an indication of the breadth of the rally, other stock indexes also set records Wednesday: Standard & Poor’s 500-stock index, closing at 183.35, was up 2.79; the New York Stock Exchange composite, closing at 106.08, rose 1.51, and the American Stock Exchange market-value index, at 231.22, was up 2.02.
The NASDAQ composite index of over-the-counter stocks closed at 288.32, up 1.75 but a hair under its record of 288.35.
Three stocks gained for every one that declined on the Big Board.
New York Stock Exchange volume was 142.46 million shares, compared to 111.12 million Tuesday.
The Wilshire index of 5,000 equities closed at 1,890.373, up 24.756.
Large blocks of 10,000 or more shares traded on the NYSE totaled 3,028, compared to 2,218 on Tuesday.
Still, analysts differed over the market’s future direction in part because the intentions of institutional investors, whose activity has dominated the stock market, remain unclear. One theory is that money managers will drive the market higher by moving assets out of bonds and short-term money-market instruments into stocks.
“The market surprised everybody with its strength in January,” said Richard Fontaine, a vice president and portfolio manager for the T. Rowe Price family of mutual funds. “Now everyone who sold in January is thinking about getting fully invested again. I think you’re looking at a very powerful bull market.”
On the other side is Michael Metz, a technical analyst for Oppenheimer & Co., a New York brokerage and investment banking firm. “I think the market will run out of institutional interest here as they take a back seat and let more entrepreneurial investors take over,” he said. “The big stocks will top out here as the institutional investors sell on strength.”
One matter clouding the issue is the performance of the bond market, which has not responded with any enthusiasm to the signals of lower interest rates being read by stock traders.
“The bulls seem to be saying we’re going to get much lower rates,” said Ben Niedermeyer, money manager for Denver-based Janus Capital Management. “What gives us cause for concern is that the bond market’s been inactive.”
In Wednesday’s bond trading, prices moved mostly higher in moderate trading even as a key short-term interest rate rose. The federal funds rate, the interest on overnight loans between banks, traded at 8.675%, up from 8.313% late Monday. The markets for federal funds and U.S. government securities were closed Tuesday in observance of Lincoln’s birthday.
Meanwhile, Federal Reserve Board policy-makers were continuing a private meeting in Washington to review their strategy for 1985. Most analysts said they expect no significant changes in Fed policy to emerge from the meeting.
In the secondary market for Treasury bonds, prices of short-term governments were up 2/32 point compared to levels late Monday, while intermediate maturities rose point and long-term issues were up 10/32 point, according to the investment firm of Salomon Bros. Inc.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
In corporate trading, industrials and utilities rose 1/8 point from Tuesday’s late levels. Among tax-exempt municipal bonds, general obligations fell point from Tuesday and revenue bonds were unchanged.
