FINANCIAL MARKETS : Dow Surges 42 as Yields Tumble Again
The bond market on Thursday demonstrated fresh conviction that lower interest rates are coming, and that sent stocks surging to new highs in heavy trading.
News that unemployment claims hit their highest level in 17 months added to growing evidence that the economy is weak enough to merit an official cut in interest rates by the Federal Reserve Board.
The jobs report sparked another stampede into bonds by sidelined investors, who fear that failure to lock in today’s yields will be costly if interest rates in general slide even further.
The 30-year Treasury bond yield fell to a 16-month low of 6.47%, down from 6.54% on Wednesday. The yield on five-year T-notes dropped to 5.79% from 5.88%.
“We feel things are looking promising for a rate cut,” said Denny Niedringhaus, who manages $210 million of bonds at Southwest Bank of St. Louis.
Tom Carpenter, economist at ASB Capital Management in Washington, said comments from Fed Chairman Alan Greenspan this week signaled “that we may have entered a mild recession, and not to worry.”
After the Fed’s next meeting July 5, “at the very minimum you will see a directive saying the Fed chairman has the authority to lower rates at his discretion,” Carpenter said.
But many bond traders say the already sharp decline in bond yields this year is virtually demanding a cut in the Fed’s benchmark short-term interest rate, which is still at 6%. If the Fed fails to reduce that rate soon, bond yields will have to rebound, experts say.
That fear didn’t hold stocks back on Thursday, however. The Dow industrial average rocketed 42.54 points, or 0.9%, to a record 4,589.64, well above its previous peak of 4,553.68 set Monday.
Most broader indexes also closed at new highs, with the Standard & Poor’s 500 index gaining 1.3% to 551.07 and the Nasdaq composite index of mostly smaller stocks up 1.2% to 940.09.
More than two stocks rose for every loser on the New York Stock Exchange, and trading volume surged to 422 million shares, the fourth-highest this year.
Heavy volume in a sharply rising market is usually considered a sign that the rally is gaining strength, not losing it, many analysts say.
But some traders are troubled by the probability that much of the buying this week is quarter-end “window dressing” by portfolio managers who are lagging the market. By adding winning stocks to their portfolios in time for June 30 statements to clients, fund managers hope to look smarter in clients’ eyes.
The question then is whether managers will have the conviction to stay with those stocks once the new quarter begins--especially if the Fed fails to cut interest rates.
Among Thursday’s highlights:
* Interest-rate-sensitive issues paced the advance as bond yields fell. Among utilities, American Electric Power gained 3/4 to 35 1/8, Detroit Edison surged 3/4 to 30, US West rose 1 1/4 to 41 5/8 and Ameritech jumped 1 3/8 to 46 3/4.
Among financial issues, Morgan Stanley gained 2 to 84 3/4, Charles Schwab surged 2 1/2 to 45 3/4, Travelers jumped 1 3/8 to 44 5/8 and mutual fund manager United Asset Management was up 1 3/8 to 37.
* Drug stocks continued to rally strongly. Schering-Plough gained 2 1/8 to 45 3/8, Warner-Lambert advanced 1 5/8 to 86 1/8 and Johnson & Johnson rose 1 1/2 to 71 1/8.
Another consumer stock winner was Coca-Cola, up 7/8 to 64 7/8 after it said domestic sales growth is accelerating this quarter.
* The Dow index got a big boost from International Paper, which leaped 3 3/8 to 82 3/4 as investors poured into paper and wood stocks. The catalyst was Champion International’s announcement of a major stock buyback from shareholder Berkshire Hathaway, suggesting that other paper and wood companies also could buy back stock.
Champion International gained 2 5/8 to 52 1/2, Georgia-Pacific jumped 3 3/4 to 83 3/4 and Stone Container was up 1 to 19 1/2.
* In the technology sector, software firm Broderbund jumped 4 to 60 3/4 and computer networker 3Com rose 1 5/16 to 67 3/16 after both firms reported strong quarterly earnings.
Other tech winners included Adobe Systems, up 2 1/8 to 65 1/2; Cirrus Logic, up 3 1/8 to 67 3/8; Ascend Communications, up 3 3/4 to 50 1/4, and America Online, up 3 1/8 to 40 3/4.
Among foreign markets, London’s FTSE-100 index gained 25.5 points to 3,403.8. Tokyo’s 225-share Nikkei average eased 24.84 points to 14,926.37. Mexico’s Bolsa index rose 29.07 points to 2,047.67.
