Hint at Rate Cut Bolsters Dow by 40.7 : Markets: Fed chief Alan Greenspan says the recovery is going slower than desired, remarks that traders saw as presaging a reduction soon.
In a scenario that continues to play like a broken record, blue chip stocks soared Monday on expectations of renewed interest rate cuts.
The Dow Jones industrial average jumped 40.70 points, or 1.4%, to 3,045.62, after Federal Reserve Chairman Alan Greenspan hinted that lower interest rates may be needed to help the economy.
The Dow’s gain was accompanied by only moderate trading volume. Still, it was the largest one-day point rise since Aug. 21, when the index leaped 88.10 points to 3,001.79 after the failed Soviet coup.
Monday’s rally followed a mild selloff that took the Dow down 72.23 points last week. The pattern of brief selloffs followed by sharp rallies has prevailed on Wall Street since spring, leaving the Dow index trading almost entirely within the narrow range of 2,900 and 3,100 in that period.
Bullish analysts point out, however, that each major rally has resulted in a new peak for the Dow: 3,035.33 on June 7, 3,055.23 on Aug. 28 and 3,077.15 on Oct. 18, which remains the all-time high.
Each time that investors turn gloomy and begin to sell, something occurs to spark a new round of buying. And most frequently, the catalyst has been the belief that interest rates will continue to fall because the economy remains weak.
In a speech Monday, Greenspan described the economy as growing “a good deal slower” than is typical at this stage of a recovery. Greenspan’s frank language suggested that the Fed is on the verge of pushing short-term interest rates lower once again. (Story, A1.)
During the past year, the central bank has reduced the federal funds rate, a benchmark short-term rate, to 5% from 8%--a dramatic cut. But President Bush and some congressional leaders have argued that the Fed must bring rates down further to encourage borrowing and spending and spur economic growth.
Wall Street cheers every Fed cut because lower rates make stocks much more appealing compared to other investments, such as bank certificates of deposit. In addition, if the lower-rate tonic works and the economy begins growing at a healthy pace, many companies would enjoy higher sales and thus better earnings, which also would bolster stocks.
Thus, the Fed’s sympathetic stance appears to suggest a continuing “win-win” situation for stocks in the near term, despite near-record-high share prices, said A. C. Moore, strategist at Argus Investment Management in Santa Barbara. “Either rates are going to come down, or earnings are going to go up, and either of those things is good for the market,” he said.
Monday, New York Stock Exchange volume totaled 161.6 million shares. A total of 992 stocks rose while 607 fell.
Analysts said the buying was partly fueled by technical factors, including program trading and short-covering by traders who had bet last week that stocks would continue to sink. When the rally gained steam, many short-sellers rushed in to cover their positions.
The rally was led by transportation stocks, a bellwether group for the economy. UAL, parent of United Airlines, rose 3 to 134 3/8; Delta gained 1 7/8 to 62 7/8, and railroad Conrail added 1 to 78 1/8.
Another strong group was drug stocks, which have been volatile lately. Merck rose 3 1/2 to 134 1/4, Pfizer gained 2 1/4 to 70, and Immune Response soared 6 to 45 3/4.
Also rallying sharply were insurance stocks, on the hope that price wars among major insurers are ending. CNA Financial jumped 4 3/4 to 92, Chubb added 1 5/8 to 65 3/4, and AIG rose 1 5/8 to 84 1/4.
Overseas, London stocks were helped by Wall Street’s rally. The Financial Times 100-share average rose 43.8 points, or 1.7%, to 2,558.5. In Frankfurt, the DAX average closed up 4.78 points to 1,576.81.
Tokyo stocks limped through a dull session. The Nikkei average eased 4.71 points to 24,901.72.
Credit
Treasury bonds reversed an early selloff after Fed Chairman Greenspan suggested that the central bank was ready to lower interest rates again.
The price of the Treasury’s key 30-year bond closed up 3/16 of a point, or $1.88 per $1,000 in face amount. Its yield slipped to 8.03% from Friday’s 8.04%.
Also fueling bond buying was the Treasury’s announcement that it would borrow $75.8 billion in the fourth quarter. The amount was lower than expected.
The federal funds rate, the interest on overnight loans between banks, closed at 5.188%, unchanged from late Friday.
Currency
The dollar closed higher against most major currencies despite new signs that interest rates are heading lower. Several traders said the dollar’s rise came amid speculation that the government’s third-quarter gross national product report, scheduled for release today, would suggest faster growth.
In New York, the dollar closed at 1.717 German marks, up from 1.700 late Friday. It also rose to 132.29 Japanese yen, up from 131.45.
Commodities
Wheat futures prices fell sharply on the Chicago Board of Trade after a weekend of heavy rain in the southern Great Plains eased worries about the winter crop.
December wheat fell 7.25 cents to $3.575 a bushel, wiping out nearly all of last week’s gains.
Meanwhile, on New York’s Comex, gold for December fell $1.90 to $360.80 an ounce; December silver dropped 2 cents to $4.08.
Crude oil rallied on the New York Merc. Light, sweet crude oil for December rose 9 cents to $23.21 a barrel.
Market Roundup, D12
