Dow Soars 75.23 in Best 1-Day Surge in History : ‘Mystery Move’ Regains Over Half of Five-Day Loss; Some See an End to Monthlong ‘Correction’
The stock market on Tuesday unleashed a potent rally as the Dow Jones industrial average turned in its largest one-day point gain in history, a 75.23-point surge, of which more than half came in the last hour of trading.
The rally gathered steam late in the day as large institutional investors hurried to cover their earlier bets that the market would continue heading down. In all, the move erased more than half of the Dow’s 120-point loss of the previous five days.
Many Analysts Surprised
The rebound surprised many market analysts, particularly because it occurred after the Dow index fell an additional 16 points in the first hour of trading. “This has got to be one of the mystery moves of Wall Street,” said Michael Metz, market strategist for the investment firm of Oppenheimer & Co.
Still, the surge emboldened some analysts to proclaim an end to the “correction,” or slump, that had pared 8.4% from the Dow index since its record close of 2,722.42 on Aug. 25. In percentage terms, it had been the largest correction of the year.
“For the Dow to rise 40 points in less than 1 1/2 hours just shows the high willingness people have to buy the stock market,” said Bessem Snaije, assistant vice president for arbitrage at the New York office of Banque Paribas.
The Dow closed Tuesday at 2,568.05, and trading volume on the New York Stock Exchange reached 209.51 million shares, compared to 170.07 million on Monday. Of the 30 stocks from which the Dow index is computed, only one closed lower Tuesday. That was Bethlehem Steel, which announced Monday that it might soon file for bankruptcy protection from creditors.
Tuesday’s rally handily outstripped the previous one-day record point gain of 69.89, reached April 3. In percentage terms, however, the day’s gain of 3.02% is still a piker compared to the Dow’s record 15.34% gain on March 15, 1933, in the heart of the Great Depression. At that time, the Dow index rose 8.26 points to 62.10.
Traders and analysts said the market appeared to be reacting Tuesday to a combination of positive economic news and technical developments.
The federal government reported that its budget deficit in August narrowed to $21.73 billion from $28.06 billion in August, 1986.
The bond market gained ground, with long-maturity Treasury securities rising almost $1 in price for every $1,000 in face value; the dollar was also strong all day in foreign exchange trading against the German mark and Japanese yen. Both markets have been closely watched this summer by professional securities traders concerned about whether increases in interest rates and inflation are on the horizon.
Fears Called Premature
Many economists were arguing Tuesday that such fears are premature. “Even in the early stages of interest rate rises,” said Allen Sinai, chief economist for Shearson Lehman Bros., “the stock market historically continues to rise. In the past, it hasn’t given up until it can see the whites of the recession’s eyes.” Federal Reserve Board Chairman Alan S. Greenspan had said late Monday that he saw no signs of a surge in inflation.
Internal market factors also may have fueled the record rally. Stock mutual funds, which have been leading forces in the market, had accumulated an enormous hoard of cash over the summer as they cashed out of profitable positions and awaited an excuse to return to the market. One reliable estimate placed the total cash holdings of mutual funds at $20 billion, or 10% of the funds’ total assets.
“In the past, cash has been so high only when the funds have had an incentive for it, like interest rates in the 15%-20% range,” said Norman Fosback, a leading market analyst. “Today, rates are in the middle range and, in that context, there’s no reason not to reinvest the cash in stocks.”
Fosback did, however, sound a note of caution: Higher stock prices have reduced the combined dividend yield of the Standard & Poor’s 500 index--the stock index most closely followed by professional investors--to about 2.7%, nearly matching the 2.65% reached in January, 1973, the first month of a two-year bear market.
“That’s clearly a very bearish long-term sign,” he said from his St. Petersburg, Fla., office.
Much of Tuesday’s buying was in stocks that had experienced short-term falls from grace. “The most-active list included a lot of recent disasters,” Metz remarked.
Among them were the retailer Gap Inc., which had dropped sharply Friday and Monday after the disclosure of poor quarterly earnings but which regained 62.5 cents to $37.625 on volume of 1.95 million shares, and Limited Inc., which also had slumped as investors bailed out of specialty retailing stocks. That stock bounced back $2.25 to $37.
Technology stocks, on which investors had been taking profits for more than a week, were strong Tuesday. IBM gained $5.25 to close at $155.75 on volume of 2.92 million shares, and Digital Equipment closed at $190, up $7.50, in heavy trading. Oil stocks also benefited from increased military tensions in the Persian Gulf, with Exxon, Chevron and Atlantic Richfield all surging.
Part of the accelerated buying Tuesday may have occurred because managers of institutional investment pools such as pension funds and insurance portfolios faced an important deadline: For many, it was the last day to purchase stocks for the third-quarter closing on Sept. 30, as trades are often credited only five business days after they are placed.
Besides the Dow industrials, other widely followed indexes also showed strong gains. Among them were the Standard & Poor’s 500 index, which rose 8.96 to 319.50; the New York Stock Exchange composite, up 4.23 to 178.48; the American Stock Exchange composite, up 1.58 to 351.33, and the NASDAQ index of over-the-counter stocks, up 1.89 to 437.90.
