Dow Rally Continues as Fed Cuts Key Rate
The stock market rose to another record Friday as the Federal Reserve made good on its Thursday promise to ease interest rates.
The Dow Jones industrial index closed up 10.40 points to a record 2,980.20--ignoring the Friday the 13th jinx. The Dow had made a powerful run at the 3,000 mark, piercing it just briefly in early afternoon before quickly falling back on profit taking. The index rose 37.13 on Thursday.
On Wall Street and elsewhere, meanwhile, the debate intensified over whether the market’s renewed strength is just a prelude to a ‘90s boom.
New York Stock Exchange volume continued heavy for a second straight day, reaching 215.60 million shares Friday. And in a sign of broad investor interest, the NYSE composite index hit a new high, rising 1.01 points to 200.33. The old record was 200.21, set June 4.
Stocks advanced as the Federal Reserve acted to push market interest rates lower by pumping cash into the banking system. The move came on the heels of Fed Chairman Alan Greenspan’s testimony on Capitol Hill on Thursday, during which Greenspan suggested that the central bank might have to ease rates to counter a credit crunch caused by skittish bankers.
The federal funds rate--the Fed-influenced rate that banks charge each other for overnight loans--fell to 8% Friday from 8.25% Thursday, as the Fed acted.
Stubborn interest rates have been the chief obstacle that many investors have cited in their reluctance to join Wall Street’s spring rally. Now, with rates heading lower, more investors may decide that the people buying stocks in May and June knew something that the rest of Wall Street didn’t.
“I think Greenspan’s statement took a lot of people by surprise,” said Ron Ognar, manager of the Kemper Growth stock mutual fund in Chicago.
The market’s failure to top the 3,000 level on its first attempt wasn’t surprising, analysts said, given the psychological significance of that mark. But the bulls believe that there is an ongoing--and dramatic--shift in investors’ attitude that will propel stocks higher both short-term and long-term.
“This is a momentum market now. People want to believe in it,” said Eric Miller, strategist at Donaldson, Lufkin & Jenrette Securities in New York. The 3,000 level will probably be easily breached very soon, he said.
What investors have been wrestling with since last fall is the idea of a return to basics on Wall Street. The speculative takeover game of the late 1980s was finished by the death of junk bond financing in 1989. Now, more investors are focusing on individual stocks for their growth potential--the traditional approach to investing that fell out of favor in the ‘80s.
“It’s the same game again that it was 10 years ago or 20 years ago: picking the right stocks,” Ognar said.
Moreover, some analysts say there increasingly appears to be a change in investors’ time horizons. While the 1980s were categorized by short-term thinking, more investors seem to be viewing stocks’ potential now with a longer-term perspective. The fall of communism and the boom in world trade suggest major opportunities for companies to prosper in the ‘90s.
“I think people are saying that there are some wonderful multinational companies out there that are likely to enjoy a great environment in the ‘90s,” Miller said. Such stocks as Boeing, Disney, Merck and Coca-Cola, for example, all have enjoyed strong runs this year. “People don’t want to sell them,” Miller said.
Stocks also look more alluring compared to the alternatives. Real estate values are declining in many regions; there are no new junk bonds to buy, and declining interest rates mean that bank CDs will become even less attractive.
Even so, some experts believe that the market has taken too rosy a view of the near-term outlook. “I still think we’re in a bear market,” says Richard Russell, editor of Dow Theory Letter in La Jolla. Yes, capitalism is spreading worldwide, he says. “But it’s going to take a lot of money to finance all of it,” he said. He believes that means higher interest rates ahead.
Other analysts worry about the market’s potential to sell off over the next few months if Congress and the Bush Administration make no progress toward an agreement to slash the federal budget deficit.
Still, unless the world economy crumbles over the next few years, experts admit that it’s tough to figure why stock prices shouldn’t be substantially higher by the mid-’90s. And if investors are truly looking that far ahead, the current rally may just be a start.
Don’t underestimate the ability of markets to far exceed expectations when emotions begin to turn, says Peter Anderson, who manages $1.2 billion in stock funds for Federated Investors in Pittsburgh. “We can talk all we want about fundamentals,” he says, “but any market has a tremendous amount of psychology in it, up or down.”
Friday market highlights:
* On the NYSE, 954 stocks rose while 619 declined. Buying was heaviest in airline stocks, which have lagged recently. AMR jumped 2 to 63 3/8, USAir added 1 1/2 to 25 3/4 and Alaska Air rose 3/4 to 23 1/2.
* Industrial stocks also gained, investors betting on the likelihood of a stronger economy as interest rates fall. Bethlehem Steel rose 7/8 to 17 3/8, GE gained 1 1/2 to 74 7/8 and Ingersoll Rand rose 1 3/8 to 58 1/8.
* Castle & Cooke rocketed 6 to 36 1/2 on news that it may sell its Dole subsidiary.
* In Tokyo, the 225-share Nikkei average gained 69.05 points to 32,644.37. In London, stocks ended higher in dull trading. The Financial Times-Stock Exchange 100-share index was up 11.7 points to close at 2,382.2. In Frankfurt, strong buying of a handful of stocks boosted the 30-share DAX index 15.11 points to 1,931.33.
CREDIT
Bond Prices Climb Broadly Once Again Bond prices posted another broad advance as the Federal Reserve moved to ease credit. A modest wholesale inflation report for June helped.
A day after Fed Chairman Alan Greenspan hinted that the Fed was poised to relax credit conditions because loans were becoming harder to get, the Fed injected reserves into the banking system, pushing the benchmark federal funds rate to 8% from 8.25%.
Bonds rallied on the news: The Treasury’s benchmark 30-year bond climbed 17/32 point, or about $5.25 per $1,000 face amount. Its yield dropped to 8.45% from 8.49% late Thursday. The yield was 8.56% as recently as Wednesday.
Short-term interest rates also fell. Rates on 3-month T-bills slid to 7.60% from 7.68% Thursday.
CURRENCY
Dollar Rebounds in Volatile Trading The dollar rose domestically Friday in heavy trading after falling in Europe. Traders said the dollar rose after the Commerce Department reported that wholesale prices climbed a modest 0.2% in June, indicating low inflation. But an easing of interest rates by the Fed then knocked the dollar, on the expectation that lower rates will make dollar-denominated investments less attractive.
Later in trading, the dollar climbed again, partly because European traders were buying to shore up their positions.
In Tokyo, the dollar fell to its lowest level since Feb. 22, closing at 147.42 yen, down 1.48 yen from Thursday. Later in London, the dollar firmed to 147.50 yen. In New York, one dollar bought 148.15 yen, up from 147.40 yen late Thursday.
COMMODITIES
Gold Futures Strong for a Second Day Gold futures prices rallied strongly on New York’s Commodity Exchange. The August contract rose $6.20 to $365.70 an ounce.
The rally in gold extended a $3.90 gain posted Thursday after Greenspan’s comments. Some traders are betting that an easing of interest rates will lead to new economic strength and eventually higher inflation.
But Bernard Savaiko, analyst with Paine Webber, said other conditions did not appear right for gold to sustain the rally.
Tables begin on D5
FLIRTING WITH 3,000 The prospect of lower interest rates propelled the Dow 30 into record territory Friday. The widely watched index briefly moved above the 3,000 level during the afternoon before settling back on profit taking, but the close of 2,980.20 was still a record. The chart tracks the index on the quarter hour.
Thursday close: 2,969.80
1:36 p.m.: 3,002.23
Friday close: 2,980.20
