Dow Soars 38.24 as Fed Acts on Interest Rates

The stock market catapulted to near-record heights Tuesday, encouraged by another drop in interest rates engineered by the Federal Reserve.

The Dow Jones industrial average jumped 38.24 points, or 1.3%, to settle at 3,027.28, its fourth-highest close ever. The Dow is just a short hop from its all-time high of 3,035.33 set on June 3 and could easily cross that mark today, traders said.

Analysts called the advance broad-based and impressive:

* On the New York Stock Exchange, advancing issues outnumbered declining ones by nearly 2 to 1, though volume remained moderate at 174.46 million shares.

* Virtually every industry sector posted gains. About 121 NYSE stocks touched 52-week highs during trading, compared to only nine that touched new lows.

The market opened on a listless note, and prices seesawed until the Federal Reserve suddenly added reserves to the nation’s banking system in an apparently decisive bid to push interest rates lower. (Main story, A1.)

Many investors assumed last Friday that the Fed would act at some point soon to cut rates, in the wake of a disappointing employment report for July. The report showed continued job losses nationwide, raising the chances that the economy’s recovery from recession was faltering after just a few months of renewed growth.

The Fed rate cut “implies that bank lending is going to increase and that the recovery in the economy and in (corporate) earnings will be on firm footing,” said Hugh Johnson, a senior vice president at First Albany Corp.

The drop in interest rates triggered computer-driven buy programs on Wall Street, said Gene Jay Seagle, a vice president at Gruntal Financial. While computer trading can exaggerate a move in either direction, Seagle said Tuesday’s computer-driven buying will “feed a positive market psychology” and help coax investors from the sidelines.

Among the market highlights:

* The Dow’s advance was powered by Philip Morris, up 2 5/8 to 71 1/2; Coca-Cola, 1 3/8 higher to 63 1/2; Exxon, up 1 3/8 to 59 3/4; Merck, 1 3/4 higher to 128 1/8, and Dupont, up 1 1/4 to 49.

* Many interest rate-sensitive stocks did particularly well. Federal National Mortgage jumped 1 5/8 to 58 3/4, Banc One gained 1 3/8 to 45 1/4, Golden West Financial soared 2 3/8 to 41 3/8 and Ahmanson rose 7/8 to 18 3/4.

* Drug stocks, recent market leaders, soared again. Lilly gained 5/8 at 79 1/4, Pfizer jumped 2 1/4 to 65 1/8, Syncor added 3/4 to 18 1/2 and Abbott Labs rose 1 to 55 1/8.

* Many technology stocks were snapped up by bargain hunters. FileNet gained 3/4 to 16, Intel was up 2 to 50 3/4, Compaq rose 1 to 36 1/2, Motorola added 1 3/8 to 66 5/8 and Microsoft gained 2 1/4 to 74 1/2.

* Smaller stocks in general lagged the Dow. The NASDAQ composite index gained 2.59 points, or 0.5%, to 505.20. Still, investors continue to employ a “stick with the winners” strategy, and jumped on many smaller growth stocks that have advanced strongly in recent months.

Among Southland-based growth companies, DEP Corp. jumped 3/4 to 10 1/2, American Ecology rose 1 1/2 to 18 1/4, Tokos Medical advanced 1/2 to 31 3/4 and Agouron Pharmaceuticals was up 3/4 to 15 1/4.

Overseas markets preceded the U.S. market’s opening with disappointing sessions. In London, the Financial Times-Stock Exchange 100-share index closed down 12.1 points at 2,573.3. In Frankfurt, Germany, the DAX index ended down 10.13 points at 1,611.90.

In Tokyo, the Nikkei average lost 368.29 points to 23,464.96.

Meanwhile, the Mexican Stock Exchange drew no strength from Wall Street, as the Bolsa index slid 16.55 points, or 1.4%, to 1,169.25.

Credit

Bond yields dropped to their lowest levels in nearly three months after the Federal Reserve signaled that it wants lower interest rates to keep the economy from stumbling back into recession. The bond rally occurred even as the Treasury launched its record quarterly bond sale.

* The Treasury’s 30-year bond rose 17/32 point, or about $5.31 per $1,000 in face amount. Its yield fell to 8.17% from 8.22% late Monday. The latest yield is the lowest since May 10.

* The discount rate on three-month Treasury bills dropped to 5.42% from 5.51% on Monday.

Bond yields began to fall around noon after it became clear that the Fed had added reserves to the nation’s money supply.

The Fed signaled a cut in the federal funds rate--what banks charge each other for overnight loans--to 5.50% from 5.75%. That move will lower banks’ cost of funds, and thus will allow them to cut loan rates to stimulate borrowing and economic demand.

Bond investors often fear stronger economic growth because of the potential for higher inflation, which erodes bond returns. But in the wake of weak economic statistics of late, traders apparently decided the Fed cut did not raise the risk of inflation.

Thus, investors were willing to rush in to buy bonds Tuesday, figuring that all interest rates are likely to follow the fed funds rate lower in coming months. (Market Beat column, D1.)

By stimulating bond buying, the Fed helped grease the first leg of a record three-day Treasury bond sale. The average yield on three-year notes sold Tuesday was 6.92%, about as expected. Traders said the auction wasn’t spectacular, but nonetheless showed a strong demand from investors eager to lock-in longer-term yields.

The government will sell $12 billion in 10-year notes today and $12 billion in 30-year bonds on Thursday and Friday.

Currency

The dollar continued to slide as U.S. interest rates fell.

The dollar had plunged versus the German mark in recent days on expectations of a drop in interest rates. In New York on Tuesday, the dollar closed at 1.709 marks, down from 1.717 on Monday and 1.741 on Friday.

The dollar fell against most other currencies, though it closed flat against the Japanese yen, at 135.65.

A major question now is whether Germany’s central bank will raise rates even as the Fed cuts rates. Concerned by rising inflation, Germany’s central bank issued clear signals Tuesday of higher rates.

“The discount rate no longer matches our current tight monetary policy,” said Karl Thomas, a member of the Bundesbank’s policy-making council, which meets next week and is expected to discuss interest rate policy. “A rise in the discount rate has been overdue for a long time,” he said.

Commodity

Soybean futures prices continued to tumble as rain brought relief to drought-stressed Midwest fields.

Soybeans settled 2 1/4 to 38 cents lower on the Chicago Board of Trade, with the contract for delivery in August at $5.69 1/2 a bushel.

In grain trading in Chicago, wheat futures were 3/4 cent lower to 2 1/4 cents higher, with September at $2.93 a bushel; corn was 1 3/4 cents lower to 1/4 cent higher, with September at $2.52 1/2 a bushel.

Up to two inches of rain either fell or was expected to fall by Thursday night in parts of Iowa, Illinois and Indiana. The area includes about a third of the region’s drought-stricken areas.

Elsewhere, on New York’s Comex, gold ended unchanged to 50 cents higher, with August at $356.70 an ounce; silver was 1.8 to 2 cents higher, with September at $3.96. On the New York Merc, light, sweet crude oil fell 10 cents to $21.37 a barrel.

Market Roundup, D8