FINANCIAL MARKETS : Stocks Rally Solidly; Bond Yields Fall

Stocks rallied broadly Tuesday after the dollar stabilized, and long-term bond yields fell, at least temporarily soothing investor worries about the corrosive effects of inflation and higher interest rates.

The Dow Jones industrial average rose 24.61 points to 3,775.83, its biggest one-day gain since Aug. 1. The Dow average was up as much as 40 points in intra-day trading.

In previous sessions, stock prices retreated and interest rates had moved higher on concerns that the flagging dollar could prove inflationary. Investors had also speculated that the dollar’s weakness could prompt the Federal Reserve Board to tighten interest rates, which it already has done five times this year.

But the currency’s partial recovery Tuesday “takes the pressure off (the Fed) to have to do something about it,” said John Burnett, senior vice president at Donaldson, Lufkin & Jenrette Securities.

The dollar seemed to be the catalyst for the market’s behavior Tuesday, firming against the German mark and yen.

The bond market, which has been unnerved by the dollar’s recent bouts of weakness, responded by bidding yields lower and prices higher for the first time in four sessions.

The decline in bond yields was modest, disappointing some participants hoping for more investor response to a Treasury auction of two-year notes.

The auction results were described as robust, with securities dealers snapping up the fresh batch of intermediate securities offered by the Treasury Department. But there was relatively little follow-up buying by investors in the secondary market, where new securities are bought and sold.

By day’s end, the yield on the Treasury’s main 30-year bond eased to 7.54% from 7.55% on Monday. Its price, which moves in the opposite direction, was up 3/16 point, or $1.88 per $1,000 in face value.

In the currency market, the dollar edged up from a five-week low against the Japanese yen and gained on the German mark in an advance fueled partly by rumors that Japan’s central bank was purchasing the U.S. currency.

Still, the strength faded by the afternoon, leaving the dollar only slightly higher for the day.

In New York trading, the dollar was quoted at 97.90 Japanese yen and 1.532 German marks, up from 97.83 yen and 1.527 marks on Monday.

“I think that every piece of bad news possible has been thrown at this market, and they haven’t been able to get stock prices down,” said Robert Kahan, manager of equity trading at Montgomery Securities in San Francisco.

However, Robert Stovall, president of Stovall/Twenty-First Advisers in New York, was not as sanguine about the market’s future direction. He said the dollar has been weak in part because of foreign investors’ lack of confidence in the Clinton Administration and in congressional attempts at crime and health care reform, issues that will not be resolved immediately.

“If the dollar and the bond market weaken, the stock market will weaken as well,” Stovall said. “There’s not much to hold the stock market. Prices are high relative to earnings and dividends.”

Still, Tuesday’s rally was deep, with advancing issues outpacing declining ones by about 7 to 4 on the New York Stock Exchange, where volume totaled 307.44 million shares, up from 235.88 million on Monday.

The NYSE’s composite index rose 1.17 to 256.44. The Nasdaq index of mostly smaller companies, rose 5.69 to 747.98, its best level since April 11. At the American Stock Exchange, the market value index rose 0.51 to 446.28. The Standard & Poor’s 500 list rose 2.19 to 464.51.

Among the market highlights:

Wall Street’s rally was led by economically sensitive industrial companies, which tend to do better in an expanding economy. These were boosted by Deere, which rose 3 5/8 to 69 5/8 after posting record third-quarter earnings. The rise in Deere helped boost Caterpillar, which rose 4 3/8 to 111 5/8.

* AlliedSignal gained 1 1/8 to 35 3/4 as defense stocks recovered from a drop Monday following reports that the Pentagon plans to cut or postpone various defense projects.

Interest-sensitive issues, such as those of banking and brokerage firms, advanced as interest rates fell. Chemical Banking added 3/8 to 39 3/8, and Morgan Stanley rose 1 5/8 to 69 1/8.

* Among other components of the Dow industrial average, Philip Morris added 1 3/8 to 56 5/8, amid speculation that the company might raise its dividend by 5% to 10% or announce a new share repurchase program at its Aug. 31 board meeting.

* Novell rose 7/8 to 14 7/8, and Microsoft added 7/8 to 55 1/2, after the rival software companies said they had met to discuss ways to make their products work better together.

* Telefonos de Mexico retreated 3/4 to 65 3/4 after Monday’s rally on the outcome of Sunday’s presidential election in Mexico.

* PepsiCo rose 1/2 to 34 after Goldman Sachs upgraded the stock.

* Quantum, one of a group of disk-drive makers downgraded by Hambrecht & Quist, fell 1 1/2 to 15 3/8.

* Takeover speculation boosted several biotech issues, traders and analysts said. Chiron rose 4 1/4 to 65 3/4, and BioGen rose 2 7/16 to 50 3/8.

Overseas, Tokyo stocks finished weaker in light, directionless trading, with the Nikkei 225-share average ending down 13.80 at 20,380.78. In Frankfurt, the DAX 30-share average fell 15.92 points to 2,107.87, while in London, the Financial Times 100-share average gained 3.8 points to close at 3,175.1.

In Mexico, the Bolsa index closed 3.44 points lower at 2,755.53, shedding earlier gains on a bout of profit taking, traders said.