FINANCIAL MARKETS : Dow Hits High on Fed Outlook; Mexico Rallies

U.S. stocks climbed Monday to their third straight record high, in part demonstrating investors’ confidence that the Federal Reserve Board won’t raise interest rates when it meets today.

The Dow Jones industrial average, which surged nearly 51 points on Friday, added 18.67 points to close at a record 4,157.34 in a late rally Monday.

The broad market also advanced, supported by another slide in bond yields, a firmer dollar and a sharp rally in Mexican stocks.

Traders also said that both stocks and bonds are now witnessing a “piling on” by big investors who are reconstituting their portfolios before the first quarter ends Friday. Institutional investors who have missed the markets’ huge rallies this year are rushing to get on board.

The Dow has soared 8.4% so far this year, from 3,834.44 on Dec. 31. The Nasdaq composite index of mostly smaller stocks, up 3.97 points to a record 822.63 on Monday, has risen 9.4%.

While some analysts worry that the markets are in danger of overheating in the short run, they note that the buying has been supported by the economy’s fundamentals: Most investors seem convinced that business activity is slowing to a more moderate pace, removing the threat of sharply higher interest rates or higher inflation.

Indeed, the Fed is expected to leave short-term interest rates unchanged at its policy-making meeting today.

In another sign of a slowing economy, a report issued Monday shows that nationwide sales of existing homes posted a larger-than-expected drop in February.

That helped push long-term bond yields down again. The yield on the Treasury’s benchmark 30-year bond closed at 7.31%, down from 7.36% on Friday and the lowest since June 14.

On Friday, bond yields sank and stocks soared after the government reported that orders for big-ticket durable goods fell in February.

“As far as the market overall is concerned, I think we’re still seeing a lot of optimism regarding the concept of a ‘soft landing’ ” for the economy, said James Solloway, director of research at Argus Research Corp.

The soft-landing bet assumes that the economy will slow enough to keep interest rates stable but not enough to substantially crimp corporate earnings growth.

In the broad market Monday, gainers outnumbered losers by about 5 to 3 on the New York Stock Exchange, though trading eased to 296 million shares from Friday’s 369 million.

Elsewhere, the dollar strengthened against the yen after Japan’s finance minister indicated that he favors lower Japanese interest rates in an effort to halt the yen’s stunning rise against the dollar.

But the buck lost ground against the German mark as speculation diminished that Germany’s central bank would follow any Japanese rate cut.

In New York, the dollar closed at 89.45 yen, up from 88.98 on Friday, and at 1.406 marks, down from 1.418.

Meanwhile, foreign stock markets were generally higher. In Mexico City, the Bolsa index surged 99.42 points, or 5.8%, to 1,822.45, after leaping 6.6% on Friday. Analysts credited a stronger peso and growing optimism about the government’s plan to end the country’s financial crisis.

In Tokyo, the 225-share Nikkei average rebounded 346.48 points to 16,096.25 on expectations of an interest rate cut.

European markets were mixed. Frankfurt’s DAX index gained 21.48 points to 1,946.90; London’s FTSE-100 index eased 3.6 points to 3,149.8.

Among Monday’s U.S. market highlights:

* Transportation stocks led the market, responding to expectations of improving profits at airlines. The Dow transports index soared 47.04 points, or 3%, to 1,628.06, led by Delta, up 3 3/8 to 61 5/8; American Airlines parent AMR, up 2 3/4 to 64 7/8; United Airlines parent UAL, up 7 1/8 to 102 7/8, and Federal Express, up 2 3/8 to 68.

* Health care stocks were broadly higher. News of a potential merger between California HMOs WellPoint Health and Health Systems sent those shares up 2 3/4 to 33 3/4 and 1 3/8 to 32 3/8, respectively, and rallied other HMOs. U.S. Healthcare gained 1 3/4 to 46 3/4, FHP jumped 3/4 to 29 3/4 and PacifiCare A shares rose 1 3/4 to 71 1/2.

Many drug stocks were also strong after Eli Lilly said first-quarter earnings will be better than expected. Lilly jumped 3 1/8 to 76 3/4, Pfizer added 1 1/8 to 89 1/2 and Schering-Plough was up 1 to 78 1/4.

Elsewhere, health care management company Value Health shot up 3 1/2 to 37 3/4 after agreeing to buy drug manager Diagnostek, which rose 1 3/4 to 20 1/4.

* Some casino stocks had a big day. MGM Grand leaped 4 1/2 to 30 1/4 after saying it will expand into Australia with the purchase of a hotel-casino there. Hilton Hotels jumped 3 1/4 to 76 1/4, reflecting traders’ anticipation of an announcement soon regarding either a sale or breakup of the company.

* Technology stocks’ rally continued. Intel rose 1 3/8 to 87 1/2, Cabletron Systems surged 3 3/4 to 47, Motorola added 1 1/4 to 56 5/8, IBM shot up 1 3/8 to 85 and Picturetel was up 3 to 37.

* On the downside, Southland-based Callaway Golf slid 1 1/2 to 14 in heavy trading amid reports of rising inventory and increasing competition from other golf club manufacturers. Also falling was Cobra Golf, down 1 1/8 to 26 3/4.

* Wells Fargo shares fell 3 to 156 3/4 after Merrill Lynch lowered its rating on the stock to “neutral.”